MANUAL OF POLITICAL ECONOMY. 



MANUAL 



OP 



POLITICAL ECONOMY. 



BY 



HENRY FAWCETT, M.A. 

FELLOW OF TRINITY HALT;, AND PROFESSOR OF POLITICAL ECONOMY 
m THE UNIVERSITY OP CAMBRIDGE. 



SECOND EDITION. 



Cambritrgc antr HontJon. 
MACMILLAN AND CO. 

1865. 

The right of translation and reproduction is reserved. 






Cam&rilrse : 



PRINTED BY C. J. CLAY, M.A. 
AT THE UNIVERSITY PKESS. 



Pkz»i> Walker 
SEP \2 »cww 



PREFACE TO THE SECOND EDITION. 



I HAVE seen no occasion in this Edition to alter the 
general arrangement of the work. Every chapter 
has however been most carefully revised, and I have 
endeavoured to remove various imperfections which have 
been pointed out to me by the kindness of friends. The 
events which have happened during the last two years 
have enabled me to improve many of the illustrations 
which were introduced into the first edition. As an ex- 
ample it may be mentioned that I expressed an opinion, 
that the most efficient remedy for Strikes would be the 
establishment of some system of co-partnership between 
Employers and Employed; and I at!i rejoiced to find that 
the truth of this opinion is being recognised by some of 
our largest employers of labour. The schemes of co-part- 
nership, which are now being carried out by Messrs. 
Crossley of Halifax, and the Messrs. Briggs of Methley 
near Leeds, are well worthy of the most attentive con- 
sideration. 

Trinity Hall, 

December, 1864. 



PREFACE TO THE FIRST EDITION. 



I HAVE often remarked that Political Economy is more 
frequently talked about than any other science, and 
that its principles are more frequently appealed to in the 
discussions of ordinary life. No science, however, is per- 
haps more imperfectly understood. I believe that pro- 
found mathematicians, or accomplished geologists and 
botanists, are far more numerous than real masters of the 
principles of Political Economy. Such a fact is somewhat 
surprising, when it is remembered that Political Economy 
must be appealed to, in order properly to discuss almost 
any political, financial, or social question. Sometimes it 
has no doubt happened, that people have not become 
generally familiarised with a science, because its principles 
have not been clearly explained. But Political Economy 
has never wanted able expounders. Adam Smith wrote 
the first systematic treatise on the subject, and his work 
will long continue to be read as a masterpiece of clep^'* 
exposition. Mr. John Stuart Mill's treatise on 'The Prin- 
ciples of Political Economy' is perhaps the most remark- 
able work of that great author, and the book will be 
remembered as amongst the most enduring literary pro- 



viii Preface. 

ductions of the nineteenth century. It is therefore neces- 
sary for me to explain the object I have had in view in 
writing the present work. 

The end I hope to attain, I may briefly state to be this. 
I think that all who take an interest in political and 
social questions, must desire to possess some knowledge of 
Political Economy. Mr. Mill's treatise is so complete and 
so exhaustive, that many are afraid to encounter the labour 
and thought which are requisite to master it; perhaps, 
therefore, these may be induced to read an easier and 
much shorter work. I so well remember the great advan- 
tage which I derived from reading Mr. Mill's book, that I 
would not publish my own work if I thought that it would 
withdraw students from the persual of a more complete 
treatise. I am, however, convinced that those who become 
acquainted with the first principles of Political Economy, 
will be so much struck with the attractiveness and impor- 
tance of the science, that they will not relinquish its study. 

I have not attempted to discuss all the principles of 
Political Economy in full detail; but I believe no impor- 
tant branch of the subject has been omitted; and I there- 
fore think, that the principles which are explained in the 
present work will enable the reader to obtain a somewhat 
complete view of the whole science. In order to show how 
intimately Political Economy is connected with the prac- 
tical questions of life, I have devoted a separate chapter to 
some subjects of great present interest; such, for instance, 
as Cooperative Societies— Strikes and Trades-Unions — and 
The Effects of the Recent Gold Discoveries. For the con- 
venience of the ordinary reader, and especially for those 



Preface* ix 

who may use the- book to prepare themselves for examina- 
tions, I have prefixed a very detailed summary of Con- 
tents, which may be regarded as an analysis of the work. 

I cannot conclude these prefatory remarks, without 
acknowledging the kind assistance which I have derived 
from those who have verified my statistical facts; but I 
have especially to thank my friend, the Rev. Leslie 
Stephen, Fellow of Trinity Hall. He has given me many 
most important suggestions, and has carefully revised the 
work: the accurate and complete knowledge which he 
possesses of the science makes his revision peculiarly valu- 
able. 

The labour of writing these pages would have been 
much greater, if I had not been fortunate enough to have 
a most patient and excellent amanuensis in the youth 
who is to me so faithful an attendant. 

Trinity Hall, Cambridge, 
Feb. 1863. 



CONTENTS. 

BOOK I. 
PRODUCTION OF WEALTH. 

Chaptee I. Introductory Remarks. 

In an introductory chapter it is better to give a general description of 
Political Economy, rather than to attempt an accurate definition of the 
science — Political Economy investigates the laws which regulate the 
production, the distribution, and the exchange of wealth — Popular pre- 
judice considers that Political Economy is hardhearted and selfish — This 
fallacy explained and refuted — Any commodity which has an exchangeable 
value is wealth — The civilisation of a country determines to what extent 
its natural resoiu'ces can be classed as wealth — Fallacies now known as 
the Mercantile System explained pages 3 — 10 

Chapter II. The Requisites of Production. 

The production of wealth has three requisites : land, labour, and capital — 
Capital defined to be wealth which is saved, and applied to the future 
production of wealth 11 — 13 

Chapter III. Labour as an Agent of Production. 

The simplest commodity cannot be made available for consumption with- 
out the application of many different kinds of labour — All labour does 
not contribute to the production of wealth — Hence labour is classed as 
productive and unproductive — Labour is productive when it either 
directly or indirectly embodies utilities in material objects — The most 
useful labour may be sometimes unproductive — As an example, a railway 
may be partly made and never opened — Labour which is unproductive 
may yet be very useful — Mr. Mill's definition of productive labour would 
make the labour of the schoolmaster to be unproductive, and this may be 
obviated by a wider definition — Consumption also may be either pro- 
ductive or unproductive 14 — 18 



xii Contents, 



Chapter TV. Of Capital. 

It is sometimes fallaciously supposed that capital consists of money, to 
the exclusion of any other kind of wealth — The entire capital of the 
country can never be simultaneously employed — A most useful commo- 
dity, such as wheat, need not necessarily be employed as capital — An 
individual cannot increase the capital of the country by spending wealth 
upon his own enjoyments — A demand for commodities is not a demand 
for labour — hence, the man who saves, and not the spendthrift, is the 
labourer's best friend — The science of Political Economy often only 
affirms tendencies, and therefore the results deduced from its principles 
do not always come into immediate operation — It is fallacious to suppose 
that there can be a glut of capital, and that consequently, without the 
unproductive expenditure of the I'ich, the poor could not be adequately 
employed — Wealth can only perform the functions of capital by being 
wholly or partially consumed — Foregoing principles illustrated by exam- 
ples — The rapidity with which a country recovers from a devastating 
war, explained — The consequences of raising revenue by loans, investi- 
gated — The effects of loans and taxation compared, with especial refer- 
ence to England and India — The distinction between circulating and 
fixed capital — The former is consumed by a single use, the latter may 
continue to perform its functions for a long period; food which feeds 
labourers is circulating capital ; whereas fixed capital consists of ma- 
chinery, buildings, railroads, &c. — The conversion of circulating into 
fixed capital may temporarily injure the labourers pages 19 — 51 



Chaptee y. On the Productive Power of the Three 
Requisites of Production. 

Political Economy would embrace a great number of sciences, if it investi- 
gated all the causes upon \yhich depend the productiveness of land, 
labour, and capital. Hence a definition of Political Economy is required, 
in order that some limit may be placed upon the scope of this science — 
The most fertile land may be unproductive of wealth — The chief causes 
which determine the productiveness of labour — The fallacy of estimating 
the productiveness of capital by the profits realised — All questions relat- 
ing to profits concern the distribution and not the production of wealth — 
Division of labour makes labour far more productive — This proved by 
Adam Smith's illustration with regard to pin-making — He thinks that 
division of labour increases its productiveness, for the three following 
reasons: 1st. The dexterity of the workman is increased; 2nd. Time 
is saved if the workman does not pass from one employment to another ; 
3rd. "When industry is divided into special processes, suitable machinery 
is more likely to be invented and applied — The first of these three causes 
produces the principal effect — Many writers think that Adam Smith 



Contents. xiii 

attributes too much importance to the second cause — The application of 
machinery often enforces a certain division of labour — Mr. Babbage has 
shown that Adam Smith has not pointed out that labour is economised 
when divided, since each workman can be solely employed upon the 
work for which he is best qualified — The demand for a commodity deter- 
mines the extent to which division of labour can be carried — The combi- 
nation or cooperation of labour is essential to its efficiency — Mr. Wake- 
field has classified the cooperation of labour as simple and complex — The 
first occurs when several workmen combine to do the same thing — The 
second when one industry is assisted by another — Mr. Wakefield ex- 
plained the mischief of permitting a young colony to be occupied by 
scattered settlements: the growth of the town population ought always 
to be encouraged — Mr. Wakefield's theory of colonisation corroborated 
by the effects of the gold discoveries in Australia — There cannot be co- 
operation between different industries, unless the means of communica- 
tion are good — Division of labour is an instance of the complex coopera- 
tion of labour pages 52 — 73 

Chapter YI. Production on a Large and Small Scale. 

The advantage of producing on a large scale becomes greater as the use of 
machinery is extended — This is exemplified at the present time in the 
increasing size of our manufactories and warehouses — The extent of the 
demand must influence the scale of production — The advantages and 
disadvantages of the joint-stock principle — Joint-stock companies are 
very beneficial to a country — Farming on a large and on a small scale 
compared — The increased use of machinery in agriculture makes farming 
on a large scale more advantageous — Why small farming is beneficial in 
certain special cases, such as dairy-farming 74 — 83 

Chapter VII. On the Laws which determine the 
Lncrease of Production. 

If we suppose the agents of production to be in their most efficient state, 
then the production of wealth cannot be increased, unless either land, 
labour, or capital, is increased — In the absence of agricultural improve- 
ments, more land is not brought into cultivation, unless the value of agri- 
cultural produce is increased ; this proposition is the basis of Ricardo's 
Theory of Rent — In Political Economy, the fertility or productiveness of 

' land varies inversely with the amount of labour and capital which is re- 
quired to make its produce available for consumption — x4ls the popula- 
tion of the country increases, less fertile land has to be cultivated, and 
therefore agricultural produce has a tendency to become more expensive, 
if population advances — England exemplifies the practical importance of 
employing the word * tendency' when enunciating a proposition in Poli- 
tical Economy, Since the rise in the price of wheat, which would accom- 



xiv Contents. 

pany the present increase in her population, has been counteracted, 
partly by agricultural improvements, but principally by foreign importa- 
tions of corn, consequent on Free Trade — A rise in wages usually accom- 
panies an increased demand for labour; this rise in wages creates an 
increased supply of labour by discouraging emigration, and by encourag- 
ing marriages amongst the poor — Meat and dairy produce must rise in 
price as the population of a country increases, because these commo- 
dities, unlike corn, are difficult and expensive to import from a dis- 
tance PAGES 84 — ^Q 

Chapter YIII. On the Increase of Capital. 

An increase of capital implies an increased saving — Two principal motives 
induce saving: 1st, a prudent foresight with regard to the future; 2nd, 
a desire to make wealth by an advantageous investment — The first mo- 
tive operates with regard to the bulk of the capital accumulated ; but 
upon the second motive depend the fluctuations in the amount of this 
capital — In Political Economy, as in mathematics, the causes which pro- 
duce fluctuations and disturbances often create phenomena which are 
independent of causes more constant in their effects — Each class of 
society has a recognised standard of living; if, therefore, the commodi- 
ties of ordinary use are cheapened, a greater amount of capital will be 
saved — A large portion of the capital saved in England is invested in 
foreign countries ; consequently, by checking the amount sent abroad, 
an amount which is practically unlimited may be obtained for any 
eligible home investment — The economical condition of England and 
India contrasted; the former requires cheap food; the latter, capital — 
How India is specially benefited by England's rule — The "West Indies 
neither want land nor capital, but are deficient in labour — The objection 
to the Coolie traffic — The striking feature of America's economical con- 
dition is the comparative dearness of labour, and the comparative cheap- 
ness of land — Why high farming is not remunerative in America — Com- 
merce between England and America must be especially beneficial to 
both countries 97 — 111 



BOOK 11. 
DISTRIBUTION. 

Chapter I. Preliminary Remarks on Property. 

The distribution of wealth implies the existence of rights of property, and 
the rights of property cannot be maintained without law — Property has 
not the same rights in one age or country as in another; for instance, 
the privilege of entailing property may exist in one age, but not in ano- 
ther — Man may determine according to what laws wealth should be 



Contents, xv 

distribxited, but from any particular method of distribution certain con- 
sequences must inevitably follow, and it pertains to Political Economy to 
investigate these consequences in each particular case — If private pro- 
perty is permitted, there must ensue great inequalities in wealth ; this 
fact has suggested communism — Communism, therefore, as far as possi- 
ble, limits the rights of private property — The impracticability of com- 
munism in the present state of mankind explained — The two schemes 
of communism most distinguished for intellect were those of St Simon 
and Fourier — These two schemes explained, and their impractica- 
bility pointed out — The scheme of Fourier is the most skilfully de- 
signed PAGES 115—124: 

Chapter II. The Classes amongst ivJiom Wealth is 

distributed. 

"Wealth is distributed between rent, wages, and profits; these three shares 
represent respectively the value of the service rendered to the production 
of wealth by land, labour, and capital — In England, rent, wages, and 
profits are generally received by distinct individuals, termed landlords, 
labourers, and employers — Two of the portions or even the three por- 
tions into which wealth is distributed, may belong to one individual; this 
illustrated by the case of a peasant-proprietor — The laws which regulate 
the distribution of manufactured produce are similar to those which apply 
to agricultural produce — The distribution of wealth is regulated either by 
competition or custom; as a nation advances, custom shows a greater 
tendency to succumb to competition — Labourers cannot be injured by 
competition 125 — 133 

Chapter III. Rents as determined by Competition. 

Origin of Rent — Statement and proof of Ricardo's theory of Rent — Dr. 
Whewell's objections to this theory — How rents are affected by various 
circumstances, such as the following : a reduction in the average rate of 
profit; the introduction of improved implements; arise in agricultural 
wages — In what sense the interest of the landlord is opposed to that of 
the farmer and labourer — Rents are raised more by an increase of popula- 
tion than by any other cause — The profit arising from capital spent in 
improving land, is rent — The drainage companies — Rent is not an ele- 
ment in the cost of producing food 134 151 

Chapter IY. On Wages. 

Wages are determined by a ratio between capital and population — The 
meaning of the expression that wages are regulated by demand and sup- 
ply — Malthus's Essay on Population affirms that checks on population 
are positive and preventive — Emigration the most satisfactory remedy 
for over-population — The five causes which, according to Adam Smith, 



xvi Contents, 

produce different rates of wages in different trades — An explanation of 
the different rates of wages prevailing in different localities — How wages 
are affected by good or bad trade pages 152 — 172 

Chapter Y. Profits. 

Profits are composed of the three following elements : interest on capital; 
compensation for risk ; wages of superintendence — Each trade has a cer- 
tain rate of profit peculiar to itself — This is termed the natural rate of 
profit — The profits realised in each trade constantly approximate to the 
natural rate — The causes which determine the general average rate of 
profit — In what sense Ricardo's proposition is true, that the rate of profit 
depends on wages — The rate of profit really depends upon the cost of 
labour — The high rate of profit prevailing in Australia explained — Cost 
of labour is a function of the three following variables : the efficiency of 
labour; the amount of wages estimated in produce; and the cost at which 
this produce can be purchased — The effect of each of these three causes 
upon the rate of profit illustrated 173 — 198 

Chapter YI. Peasant Proprietors. 

Distinction between a peasant-proprietor and a small tenant-farmer — When 
land is rented, large farms are more advantageous in England than small 
farms — Peasant-proprietors of Flanders and Norway — The testimony of 
Arthur Young, Mr. Thornton and others, concerning peasant-proprietors 
— The social effects of peasant-proprietorships considered — The condition 
of our own agricultural labourers and that of the peasant-proprietors of 
the Continent contrasted — Mr. Jones's opinion refuted, that peasant- 
proprietors are imprudent with regard to marriage — Peasant-proprietors 
will never again exist as a numerous class in England — The subject of 
this chapter has a special interest at the present time, because emanci- 
pated Russian serfs will become peasant-proprietors 199 — 222 

Chapter YII. Metayers and Cottiers. 

Metayer and Cottier tenancy described — In the metayer tenure the rent 
paid is always a fixed portion of the produce, but not always one-half — 
In Tuscany the metayer rent is two-thirds of the produce — The metayers 
who cultivate the most fertile land enjoy a beneficial interest — Fixed 
customs regulate the conditions of the metayer tenure, although these 
conditions vary in different countries — The contradictory opinions with 
regard to the effects of metayer tenure explained — "Why metayer farming 
is bad in France and extremely good in Italy — The condition of Irish 
cottiers most deplorable — Cottier rents are regulated by the competition 
of population, and are therefore often merely nominal — The Irish tenure 
termed 'conacre' explained — The distinction between a rack-rent tenant- 
right and a cottier tenant-right 223 — 240 






Contents. xvii 



Chapter YIII. Popular Remedies for Low Wages. 

The average wages are determined by a ratio between capital and the num- 
ber of the labouring population— If this ratio remains constant, these 
wages cannot be increased, unless either profits are diminished, or labour 
is made more efficient — Any advance in wages which is taken from profits 
cannot be permanent — A law to regulate wages must either be mis- 
chievous or nugatory— The State cannot continue to find work for all the 
unemployed, unless population is restrained by law — Why emigration is 
far more efficient than any other remedy for improving the condition of 
the poor— The evils of the parish allowance system explained— The 
advantages of the allotment-system have been exaggerated by some 
writers, and greatly underrated by others pages 241 — 255 

Chaptee IX. Trades' Unions and Strikes. 

Trades' unions not necessarily connected with strikes — Trades' unions can- 
not raise wages unless they restrict the number of workmen to be em- 
ployed in a trade — Th'is is attempted to be done by limiting the number 
of apprentices — Such restrictions, if carried into effect, inflict great in- 
justice on the labouring class; they also raise the price of commodities, 
and may jeopardise the existence of an industry — As an example of this, 
the effects of the trades' unions at Birmingham and Sheffield may be 
quoted— It is impossible for wages in any particular trade to be perma- 
nently raised by a combination on the part of the workmen — Strikes have 
been almost invariably disastrous to the workmen — The cause of this — 
A strike proves the existence of a combination amongst the masters of a 
trade — A power of combination may secure the workmen higher wages 
in times of prosperous trade — The possible tendency which strikes may 
exert to introduce new relations between employers and employed; this 
illustrated by the fact that some of our large employers of labour are 
now establishing a co-partnership between themselves and their work- 
men .., 256—276 

Chapter X. On Cooperative Institutions. 

Definition of cooperation — The origin of the cooperative movement in Eng- 
land — The Rochdale Pioneers' Store — The causes which contribute to the 
success of the cooperative store— The benefits which such a store confers 
upon the labouring classes — Important distinction between a cooperative 
store and a cooperative trading establishment— The cooperative masons 
of Paris — Their success is mainly due to the fact, that cooperation in- 
creases the efficiency of labour — The reasons why a cooperative store is 
more likely to succeed than a cooperative trading establishment — This 
proved by the Rochdale Cooperative Cotton Mill 277—294: 



xviii Contents. 

Chapter XL On the Economic Aspects of Slavery. 

Slaves are a portion of the cultivator's capital ; hence, in slave cultivation, 
the produce is distributed between rent and profits— The ultimate aboli- 
tion of slavery chiefly turns upon economic considerations— Professor 
Cairnes affirms that slave-labour has the three following defects : it is 
o-iven reluctantly; it is unskilful; it is wanting in versatility— The con- 
sequences of these defects traced— Slave-labour can only be profitably 
employed when labour can be concentrated— No skilled labour can be 
carried on by slaves— Mr. Olmstead's testimony— No parallel between 
the condition of slaves in Greece and the slaves of the present day — 
Slave-labour impoverishes the soil, hence fertile virgin soils are required 
—The acquisition of new territory is therefore indispensable to slavery 
— The present American civil war will not decide the immediate aboli- 
tion of slavery — Slavery will gradually cease to be profitable, and there- 
fore will be ultimately exterminated if restricted to a definite area. 

PAGES 295—303 



BOOK III. • 
EXCHANGE. 

Chapter I. On Value and Price. 

Why it is advantageous to discuss the production and distribution of wealth, 
before considering the exchange of wealth — Value and price defined — 
Value is a relative expression, and implies comparison — Price is the 
value of a commodity when estimated in money — There cannot be a 
general rise in values, but there can be a general rise in prices— When 
the value of one commodity is compared with that of another, it is always 
done by comparing their prices — Hence we depart from the method 
usually pursued, and proceed at once to consider the laws which determine 
the price, and not the value, of commodities— The assumption is in the 
first instance made, that any alteration in the price of a commodity is not 
produced by a change in the value of the precious metals 307—311 

Chapter IT. On the Causes which Regulate the Price 
of Commodities. 

Commodities, when their price is investigated, are divided into three classes : 
the first class comprises those commodities whose supply is absolutely 
limited; the second class comprises those commodities which become 
more expensive as their supply is increased ; the third class embraces 
those commodities whose supply can be increased without their becoming 
more expensive — Articles of vertii, agricultural produce,and manufactured 



Corttents. xix 

produce, are representatives of these three classes — The lavvs of price which 
apply to the first class, illustrated bj considering how the price of one of 
Turner's pictures is determined ; it would be usually, said that the price 
of such a picture is regulated by a ratio between the demand and the 
supply — This is erroneous; the price must be such as to equalise the de- 
mand to the supply — * Effectual Demand' defined— Value is composed of 
two elements; represented by value in use, and by the difficulty of ob- 
taining an article — These elements symbolised by letters U and.D No 

article can have an exchange value unless TJ and D are both present — 
The price of almost every commodity depends upon D, the element U 
being only partially operative— U. exerts its full influence with regard to 
those commodities which are comprised- in the first class above enumerated. 

PAGES. 312— 320 

Chapter ITI, On the Price of Agricultural Produce. 

The price of agricultural produce must be such as to give the farmer the 
ordinary profit for his capital and for his labour of superintendence — If, 
therefore^ the rent of land increases without a diminution in the farmer's 
other expenses, the price of agricultural produce must rise in order that 
the farmer maybe compensated — ^Ricardo's theory proves that rents must 
rise if, as population increases, worse land has to be cultivated ; but if 
rents rise, the price of agricultural produce must rise-^-The land which is 
on the margin of cultivation only pays a nominal rent ; and the price of 
agricultural produce must be always such as to give the ordinary rate of 
profit for cultivating this land— From this last proposition it follows that 
the price of agricultural produce is not affected by the payment of rent, 
but b}' the demand for agricultural produce, since the demand determines 
how far the margin of cultivation must descend — The rise in the price of 
agricultural produce consequent on an increase in population may be 
counteracted either by agricultural improvements or by the importation of 
corn — The price of mineral produce is regula.ted by laws similar to those 
which determine the price of agricultural produce — A commodity is said 
to be at its natural price, when its price is such as to equalise the supply 
to the demand — The natural price denotes a position of eqiiilibrium— 
A parallel drawn between this position and the elliptic planetary 
orbits 321-328 

Chapter IY. On the Price of Manufactured 
Commodities. 

Why the laws of price which apply to agriculturarproduce do not apply to 
manufactured produce — An increased demand for a manufactured com- 
modity may economise some of the processes of manufacture and thus 
diminish the price of a commodity— This illustrated by Mr. Thompson's 
invention for boatbuilding— The competition of capital causes a certain 

62 



XX 



Contents. 



average rate of profit to belong to each branch of industry— Hence the 
price of a commodity must have a constant tendency to be such as to give 
this particular rate of profit— Consequently the price of a manufactured 
commodity constantly approximates to its cost of production— Cost of 
production includes the profits of the producer— Sudden fluctuations in 
the demand or supply may cause the price of a commodity to vary 
greatly from its cost of production—LThese variations in price, though 
great, are, however, only temporary, since the competition of capital is 
constantly tending to make the price again equivalent to the cost of pro- 
duction—This illustrated by an example of a sudden demand for 

rifles There is a constant tendency in operation to equalise the demand 

for a commodity to its supply, both when the price of the commodity is 
regulated by its cost of production, and when its price is disturbed by 
sudden fluctuations in the demand and supply ..• pages 329 — 342 

Chapter V. On Money. 

Why we discussed the price of commodities before we considered the sub- 
ject of money— Money provides a medium of exchange, thus obviating 
barter, and money also serves as a general standard of valvjp — It is not 
necessary, but it is most convenient, that money should be made of the 
precious metals Any substance may be chosen as a general measure or 
standard of value ; if wheat was thus selected, the price of all commodi- 
ties must be estimated in wheat — The substance which is chosen as money 
ought, as far as possible, to possess the following qualities : its value 
should be uniform ; it should possess an intrinsic value of its own ; 
it should contain a great value in small bulk — Gold and silver do not 
vary much in value, because the cost of obtaining these metals is not 
liable to any great changes, and, except on rare occasions, the supply of these 
metals is not subject to sudden fluctuations — The quantity of gold and 
silver which is used for other purposes besides being coined into money 
is comparatively small, and therefore the quantity of gold required for 
such purposes does not vary greatly — Gold and silver have always pos- 
sessed an intrinsic value of their own, since no other substances are so 
well qualified for ornaments ; the brightness of these metals gives them 
beauty ; they can be long preserved, and their malleability makes them 
easily worked into artistic forms — These metals have always been scarce 

Hence they possess the third requisite for money, since they contain 

great value in a small bulk — Copper money is used for the convenience of 
making small payments — The inconvenience of a double standard — If 
gold and silver are both made a standard of value, then this standard is 
subject to increased variations — The arrangements adopted by our own 
Mint explained — Gold is in our own country the only standard of value, 
since silver and copper money are merely made subsidiary coins 343—356 



Contents. xxi 

Chapter YI. On the Value of Money. 

* Value of money' is an ambiguous expression— It is popularly used to 
describe the current interest, as represented by the bank r^fe of discount — 
In Political Economy value of money means the purchasing power of 
money— Hence the value of money increases as general prices decline, and 
vice versa — The value of gold in bullion must be the same as the value 
of gold when converted into money — The fallacy of considering that the 
value of gold has remained unchanged, because the price of gold never 
varies — The value of money is determined by the same laws as those 
which regulate the value or price of all mineral produce — Gold is devoted 
to two distinct purposes : first, it is coined into money ; secondly, it is 
employed for purposes of art and manufacture — Quantity of gold re- 
quired for the last of these two purposes does not vary greatly from year 
to year— Hence any increase in the quantity of gold produced must be 
almost entirely converted into coin — The amount of money any country 
requires partly depends upon the amount of its wealth, and partly upon 
the number of times which any commodity is bought and sold for money 
— The amount of money which a country keeps in circulation is no measure 
of its national wealth — A country requires a greater amount of money in 
circulation as its wealth and population increase — In the case of an ordinary 
commodity, the demand is equalised to the supply, by either a rise or 
fall in the price of the commodity; — But the price of gold is a meaning- 
less expression ; hence, in the case of money, the demand is equalised to 
the supply by a rise or fall in the value of the precious metals— The de- 
mand for a commodity varies with its price, but the ratio of this variation 
cannot be precisely defined, for it varies greatly with different commodi- 
ties — This last proposition illustrated by examples — The demand for the 
precious metals varies cceteris paribus, precisely in the inverse ratio of 
their value, if uniformity in general prices is preserved — If we suppose 
that the precious metals are solely employed as money, a nation has a 
demand for a greater or less amount of money, in order to maintain 
general prices unchanged — Hence, if the wealth and population of a 
country increase, the demand for money will increase — ^^It is most important 
that the value of gold, or, in other words, that general prices should fluc- 
tuate as little as possible — The supply of gold is cceteris paribus increased 
if the value of gold advances, because gold-mining becomes more profit- 
able—But an increase in the value of gold is caused by a deficiency in its 
supply — Hence an increased demand for gold stimulates an increased 
supply ; consequently the demand is equalised to the supply, and thus a 
tendency is brought into operation to preserve uniformity in general 
prices — This process of equalisation is analogous to that which takes 
place with regard to every other commodity — In the absence of any 
counteracting circumstances, the value of the precious metals must in- 
crease if the cost of obtaining them is increased, and vice versa, their 
value must decrease if the cost of obtaining them is diminished by the 
discovery of more productive mines pages 357 — 375 



xxli Contents, 

Chapter VII. Foreign Commerce or International 

Trade. 

Foreign commerce enables the capital and labour of a country to be applied 
to that branch of industry for which it possesses special advantages — If 
two countries produce commodities at a difiPerent relative cost, foreign 
trade becomes profitable to them both — Hence, it is possible that foreign 
trade maybe profitable to two countries, although all the commodities ex- 
changed might be produced cheaper in one country than in the other 
— The bargain of international trade is adjusted by equalising the supply 
of a commodity to the demand for it— The profit arising from foreign 
commerce is shared between two trading countries in the inverse ratio 
of the demand which each has for the commodities imported from the 
other — If England exports iron to France, and imports wheat, and 
if the cost of producing iron is cheapened in England, but not in 
France, the terms of the international trade must be again adjusted, so 
as to equalise the demand to the supply— It is quite possible, under the 
circumstances just supposed, that the cost to France of the iron she im- 
ports may be reduced by an amount exceeding the diminution in the 
cost of producing this iron in England— The gain which results from 
international trade is distributed amongst the consumers of the 
commodities imported, and cannot be appropriated, either by the 
producers of exported commodities, or by the merchants who carry on 
foreign trade— Foreign trade will generally cause the price of a com- 
modity which is exported to rise in the home market— The home pro- 
ducers of a commodity may temporarily suffer loss, if the price of a 
' commodity is reduced in consequence of foreign importations— But in- 
equalities in the rate of profit in any industry will always be ultimately 
removed by the competition of capital— The rent of land may be perma- 
nently reduced, if agricultural produce is cheapened by foreign importa- 
tions—Foreign trade affects the price, both of the imported and exported 
commodity— The equation of international trade, therefore, requires a 
very complicated process of adjustment, since the price both of the im- 
ported and exported commodity must be such as to equalise the supply to 
the demand for these commodities, in both the trading countries— Foreign 
commerce raises the price of the commodities exported, and reduces the 
price of those imported— Hence labourers may be injured if the ordinary 
necessaries of life are exported in exchange for commodities which the 
labourers do not largely consume— The labourers will generally be com- 
pensated for this possible injury by an increase in their money wages, 
because foreign commerce economises labour and capital, and therefore 
enables higher wages to be paid without encroaching upon profits— The 
cost of exporting and importing commodities may be borne in dififerent 
ra,tios in two different countries — The greatest portion of this cost of 
carriage would be borne by the country whose demand is least diminish- 
ed by the commodity being increased in price, in consequence of the 



Conte7its, xxiii 

cost of carriage — If it is assumed that there is perfect free trade between 
the two countries, then there cannot be a greater difference in the price 
of any commodity in the two countries than is equivalent to the cost of 
carriage — The principles investigated in this chapter are equally true 
when a great number of commodities are interchanged, and when foreign 
commerce is not restricted to two countries pages 376 — -4:03 

Chapter VIII. On the Transmission of the Precious 
Metals from One Country to Another. 

The precious metals are distributed in two ways : first, they are exported from 
the mining countries as an ordinary commodity of commerce ; secondly, 
they are transmitted from one country to another in the form of money— 
The value of the precious metals is regulated by laws identical with 
those which regulate the value of any other commodity which is ex- 
changed in foreign commerce — The precious metals are constantly trans- 
mitted in the form of money from one country to another, because, in 
the first place, they contain great value in a small bulk, and secondly, 
every kind of wealth can be purchased by gold and silver — England is to 
a great extent the emporium of gold ; a great portion of the gold which 
is produced in Australia, California, &c., is in the first instance sent to 
her, and then distributed by her to the various countries of the world — 
Although England imports and exports so much gold, yet the value of 
gold is kept in England approximately constant — This constancy in value 
is maintained, because it is impossible to obtain an undue amount of the 
precious metals, without producing a decline in the value of gold, or, 
in other words, a rise in general prices — If general prices rise in one 
country comparatively more than in another, the balance of trade is at 
once disturbed; the exports from the country are diminished, and her 
imports increased, and a drain of specie, consequently, at once com- 
mences — There is therefore a constant agency at work, which causes the 
precious metals to be equally distributed over the world 404 — 410 

Chapter IX. Foreign Exchanges, 

The commodities bought and sold in foreign commerce are usually paid for 
by bills of exchange ; this course is adopted in order as far as possible 
to obviate the transmission of specie — A bill of exchange is a written 
acknowledgment given to a creditor, that a debt due to him shall be 
paid on a particular day — If the exports sent to a particular country are 
equivalent in value to the imports received from a particular country, 
Bills of Exchange enable the transmission of specie to be as completely 
obviated as if the exports were exchanged for the imports by barter — ■ 
If the imports from France exceed in value the exports from England to 
France, English merchants will have a greater demand for bills drawn 
lipon Frunee, than French merchants for bills drawn upon England — 



xxiv Contents. 

Bills drawn upon France will consequently be at a premium — "When 
this is the case, the exchange is said to be against England, and in favour 
of France — A country has consequently to export specie when the ex- 
change is against her — Hence the expressions 'favourable 'and 'unfavour- 
able' exchange are remnants of the mercantile system— If the exchange is 
against a country, its money will be depreciated in value, when compared 
with the money of a country which has a favourable exchange— When a 
scarcity of gold is anticipated, bills may rise to a greater premium or 

fall to a greater discount than is represented by the cost of carriage 

As an example, bills drawn on France rose ten per cent, when it was 
known that Napoleon had landed from Elba— If an unfavourable exchange 
always required specie to be actually exported, the premium upon bills 
would always closely approximate to the cost of transmitting specie — 
There are, however, constant fluctuations in the premium upon bills, 
because an unfavourable exchange may be rapidly succeeded by a 
favourable exchange — An unfavourable exchange cannot be of long con- 
tinuance, because it exerts a tendency to diminish the imports, and to 
increase exports — An export of the precious metals, as ordinary com- 
modities of commerce, does not necessarily denote an unfavourable 
exchange. .......V pages 411—422 

Chapter X. The Functions of Credit 

Credit signifies borrowing and lending, and therefore implies confidence — 
It is usually more convenient to give credit in the form of money — Credit 
is said to be good when there is confidence in those who borrow — The 
credit of an individual, as well as the credit of a state, is measured by 
the rate of interest paid for money borrowed — The oft-repeated maxim, 
that credit is capital, is a meaningless expression — Credit greatly assists 
the production of wealth, because wealth which is employed as capital is 
often borrowed from those who would not themselves employ productively 
the wealth which they lend — The deposit accounts which are held by 
banks illustrate the extent to which credit increases the capital of a 
country — Large public works, such as railways, could not be carried out 
if credit did not exist; the capital which they require is so large, that it 
must be borrowed from a great number of individuals — The greatest 
benefit which England can confer on India, is to establish credit in that 
country— Credit enables all the wealth which is saved to be applied to 
the most productive purposes 423 431 

Chapter XI. The Influence of Credit on Prices. 

Bills of exchange, bank-notes, and cheques may be regarded as instruments 
of credit — A bill of exchange is a written promise to pay a certain amount 
at a fixed date; a bank-note is a certain promise to pay a certain amount 
upon demand— Different bankers exchange their cheques at the Clearing 
House, and the convenience of this course is great — Bills of exchange, 
bank-notes, and cheques provide substitutes for money — Hence the 



Contents, xxv 

influence exerted by credit on prices— When commodities are bought 
and sold by bills of exchange, the use of money is as completely dispensed 
with as if commodities were exchanged by barter— If bills of exchange 
were not employed, one of two things would happen ; either the money 
in circulation must be increased, or specie would rise in value — It is 
credit, and not the particular form in which credit is given, which pro- 
vides a substitute for money— Book credits, for instance, although not 
existing in a transferable form, may provide as complete a substitute for 
money as bills of exchange— Bills of exchange cause the amount of credit 
which is given in a country to be much greater than it would be if book 
credits were alone employed — A bank-note is a more complete substitute 
for money than bills of exchange, because if bank-notes did not exist, 
money must be employed in most of the transactions which are carried 
on by bank-notes— If bank-notes did not exist, either more money must 
be brought into circulation or general prices would decline — A country 
requires a smaller amount of money if it employs bank-notes ; hence 
bank-notes economise wealth, because gold and silver are valuable com- 
modities — No efPect is exerted on prices by bank-notes, if they simply 
occupy the place of a corresponding amount of money— General prices 
are advanced by a bank-note circulation if bank-notes are added to the 
circulation without causing a corresponding amount of money to be with- 
drawn — Credit increases the purchasing power of each individual, and in 
this way exerts a great effect on prices — The efPect, though great, is, 
however, temporary — Credit purchases may enormously increase the de- 
mand for a commodity, and hence raise its price — This rise in price is, 
however, temporary, because the price of all commodities ultimately 
approximates to their cost of production — The great purchasing power 
which may be exerted by credit, illustrated by the tea speculations in 
1839 — The provisions of the Bank Charter Act explained — Speculative 
purchases which lead to a panic are not in the first instance made by 
bank-notes; hence restrictions upon the issue of bank-notes do not pre- 
vent commercial panics — In the latter stages of a panic, the demand 
for bank-notes and other money increases because credit collapses — Hence 
it has been always necessary to suspend the Bank Charter Act after a 
panic has continued some time — "When trade is in its ordinary state, tjie 
bank-note circulation would not be increased if the Bank Act was repealed 
— The impression that the Bank Act will be suspended in a commercial 
crisis, increases the uncertainty and distrust prevalent at such a period — 
Creditors may be defrauded, and general prices may be raised without 
limit, if inconvertible notes are made a legal tender — These serious 
consequences do not occur if inconvertible notes are not made a legal 
tender pages 432 — 456 

Chapter XII. On the Rate of Interest. 

The current rate of interest is determined by the price of Funds, because 
these securities involve no risk — In this chapter, two questions have to 



xxvi Contents. 

be investigated ; in the first place, the causes which determine the normal 
or average current rate of interest must be explained, and secondly, the 
daily fluctuations in the current rate of interest must be accounted for — 
The current rate of interest must be such as will equalise the ' demand for' 
to the ' supply of ' loans— The average current rate of interest may be 
affected by national character, because some nations are more prudent, 
lind therefore satisfied with a smaller rate of interest than others— If the 
average rate of profit advances, the current rate of interest must also rise 
— The rate of profit depends on the cost of labour; the cost of labour in- 
creases if food becomes more expensive— If the current rate of interest 
advances, the price of securities and the price of land will decline — The 
causes vv^hich advance the rate of interest generally exert an influence to 
diminish the rent of land — Different rates of interest may prevail in dif- 
ferent countries, because the people of one country will not invest their 
capital in another country without receiving some additional remuneration 
— Temporai-y fluctuations in the rate of discount or in the rate of interest 
are caused by variations in the demand for money — An increase in the 
demand for money is generally produced by contraction of credit 457—4:68 

Chapter XIII On the Tendency of Profits to fall 
as a Nation advances. 

Adam Smith and Dr Chalmers erroneously supposed that the rate of profit 
was reduced by the competition of capital — A rise or fall in general prices 
need not necessarily affect the rate of profit— The average rate of profit 
is affected, not by the competition, but by the accumulation, of capital — 
The competition of capital simply exerts a tendency to equalise profits in 
different trades — The average rate of profit is partly the cause and partly 
the effect of the amount of capital accumulated — When a country advances 
in population and wealth, two agencies operate to reduce profits: in the 
first place, food becomes more expensive, and the cost of labour is in- 
creased; and secondly, a greater capital is accumulated in proportion to 
the profits which can be realised upon it — The decline in the rate of profit 
in England retarded by the great amount of capital which we invest in 
foreign countries — Industrial improvements, and the importation of cheap 
food, may prevent the cost of labour increasing as a country advances in 
population — This explains the fact that the rate of profit has not declined 
in England, although her population and wealth have both greatly in- 
creased — A nation is said to be in a stationary state, when the rate of 
profit is so low that the accumulation of capital does not further increase 

. The stationary state was more likely to be attained in the last century 

than at the present time — Surplus capital is absorbed, or rather destroyed, 
in a commercial panic; thus an influence is exerted to sustain the average 
rate of profit— A high rate of profit prevails in a colony, because fertile 
land is abundant — Agriculture must be the staple industry of a young 
colony— The returns to agriculture must be great when oniy the most 



Contents, xxvii 

fertile soils need be cultivated— Henee, in a colony, wages and profits are 
both generally high pages 469—483 

Chapter XI Y. Of Over-production or Excess of 

Supply. 

Malthus^ Chalmers, and Sismondi feared over-production, and therefore 
affirmed that some moral restraint ought to be exercised with regard to 
the accumulation of capital — Over-production has two meanings ; it may 
either signify that commodities produced cannot be sold at remunerative 
prices, or it may signify that commodities are produced which are really 
not wanted — Over-production, in its first signification, will cause the 
profits of a particular trade to be low: the trade is then said to be dull or 
depressed, but such depression can only be temporary — Tlie Lancashire 
Cotton Trade would have exhibited tliis first liind of over-production, if 
the American Civil War had not occurred—This escessive supply of cotton 
goods would not be wanted ; they would be readily purchased, if sold at 
sufficiently low prices — ^The accumulation of capital may reduce profits, 
but never causes more commodities to be produced than can be consumed 
— If capital continues to be accumulated, the wages of labourers would 
be increased — As an extreme case, it may be supposed that wages are 
so much increased, that all the wants of the labourer are satisfied ; if, 
then, his wages are still further increased, he will shorten his hours of 
toil 484—490 

Chapter XV. On the Recent Gold Discoveries. 

Predictions as to the rapid depreciation in the valvie of gold have not been 
realised — It is still difficult to decide whether gold has been depreciated 
— The amount of gold England annually obtains from California and 
Australia exceeds by four times the amount she previously obtained 
from all sources combined — Only a small portion of this additional gold is 
employed in increasing England's gold currency — The gold which Eng- 
land imports must be devoted to one of the three following purposes : 
first, it may be employed in arts and manufactures ; secondly, it may be 
coined and employed as money; thirdly, it may be re-exported to other 
countries to purchase commodities — The amount of gold devoted to the 
first purpose, though great, does not vary much from year to year; hence, 
any large and sudden increase in the supply of gold will not be absorbed 
by the first of the three modes described — As the wealth and population 
of a country increase, there will be a fall in general prices, unless a greater 
amount of money is brought into circulation— The amount of additional 
money which is required to preserve uniformity of prices cannot be pre- 
cisely determined — A comparison of the present prices of commodities 
with the prices ten years since does not enable us to decide with certainty 
whether the value of gold has been depreciated by the recent discoveries — 
This uncertainty proves that the depreciation in the value of gold cannot 



xxviii Contents, 

as yet have been considerable—The absorption of these large supplies of 
gold without producing any marked depreciation in its value, conclusively 
demonstrates that gold must have greatly risen in value, if these addi- 
tional supplies had not been forthcoming— The gold discoveries were 
made at a most opportune time; free ti^de vfa.s then causing our com- 
merce to expand in a most remarkable manner, and unless the supply of 
gold had increased, this expansion of commerce could not have taken 
place without great and sudden rise in the value of gold— The increased 
supplies of gold have been chiefly absorbed by India and China— The 
public works being constructed in India, and the great increase in our 
imports from China, render it necessary annually to export 12,000,000Z. of 
the precious metals to the East— The greater part oT this amount is silver, 
but still gold is indirectly absorbed— The silver is chiefly obtained from 
the currencies of France, and other countries, and a corresponding value 
of gold is required to take the place of this silver— Other countries whose 
trade is progressing have also absorbed gold by increasing their gold 
currencies— Whether gold is destined to be depreciated, mainly depends 
on the future condition of our eastern trade— A depreciation in the value 
of gold will inevitably occur, if the export of specie to the East should 
greatly diminish— The continuance of this export of specie is uncertain — 
Hence a depreciation in the value of gold is a possible contingency— This . 
depreciation can be best guarded against by avoiding investments the 
interest of which is represented by a fixed money payment— Why the 
gold discoveries have exerted a special influence in promoting the pros- 
perity of Australia— Gold-digging is not more profitable than other kinds 
of industry, but a gold discovery acts more powerfully than any other 
cause to attract labour and capital to a colony— Other kinds of industry 
in a young colony involve, in the first instance, great risks ; a supply of 
labour must be insured, and much fixed capital has to be expended in 
constructing roads, &c — These obstacles impede gold-digging less than 
any other industry : pages 491—511 



BOOK IV. 
TAXATION. 

Chapter I. On the General Principles of Taxation. 

Mr. Mill and others give to this portion of the subject the general title 
' The Influence of Government '—We think it advisable to limit this por- 
tion of our subject to an enquiry into taxation— Adam Smith's four rules, 
or * canons ' of taxation are the following— 1st. Taxation should be equal ; 
2nd. Taxation should be certain in its amount; 3rd. Taxes should be 
levied at the time and in the mode which causes the least inconvenience 
to the tax-payer; 4th. A tax ought to obtain for the Government as much 
as possible of the whole amount which is really levied from the tax-payer 



Contents, xxix 

— Equality of taxation is impracticable, if it means taxing people in pro- 
portion to their means ; this illustrated by the case of two individuals 
possessing equal incomes, one of whom is married, the other is not — With 
the view of obtaining equality of taxation, it would be useless to attempt 
to tax people in proportion to the protection which they derive from 
Government— The first principle of taxation is enunciated by Adam 
Smith in very ambiguous language; he affirms that when there is equality 
of taxation, people are taxed in proportion to their ability to pay — Equality 
of taxajj^n will not be secured, if it is attempted to apply this principle 
to one special tax — Equality of taxation is best secured by a rough process 
of compensation pages 515 — 527 

Chapter II. On the Income-tax. 

The proposal that temporary incomes should be taxed at a lower rate than 
permanent incomes is supported, in the first place, upon arithmetical 
grounds, and secondly, upon the general principles of taxation — The 
arithmetical argument is conclusive, that temporary incomes ought to be 
taxed at the same rate as permanent incomes, if it is assumed that the in- 
come-tax is uniform in amount, and permanent — Temporary and perma- 
nent incomes ought to be differently rated, if the continuance of the in- 
come-tax could ever be restricted to a definite period — Experience proves 
that this is impossible — The difficulty and expense of collecting the in- 
come-tax would be greatly increased, if an equitable rating of temporary 
and permanent incomes should be attempted — It is generally affirmed that 
the income-tax ought to be so adjusted, that each person should con- 
tribute to it in proportion to his means — This principle, even if it could 
be carried out, would not necessarily secure equality of taxation ; this 
proposition illustrated by considering the remission of the tax upon small 
incomes — Various other difficulties described, which render the adjustment 
of the income-tax almost impracticable — The incidence of a tax dis- 
tinguishes the real from the nominal payer of the tax — The incidence of 
the income-tax will partly fall on the labourers, if any portion of the tax 
is paid out of capital — The wealth of a country may be seriously affected 
by an income-tax, if the tax diminishes the national capital — Hence, in 
India an income-tax would produce very serious consequences, because 
there capital is accumulated very slowly — In England an income-tax pro- 
duces none of those serious consequences, since we always have a large 
surplus capital to invest in foreign countries — If the income-tax is re- 
mitted upon incomes less than lOOZ. a year, this amount ought to be de- 
ducted from all larger incomes, and only the remainder should be taxed — 
A graduated income-tax would be extremely pernicious— One serious in- 
equality affecting the income-tax, is caused by the j)ower which some 
classes have of evading it 528—551 



XXX Contents. 

Chapter III. Taxes on Commodities and other 
Indirect Taxes. 

Distinction between a direct and an indirect tax; the former is really paid 
by the person from whom it is levied; the latter is levied from one 
person, and paid by another — A tax is often made indirect by custom ; 
for instance, the poor-rates are often paid by farmers, and are therefore 
an indirect tax — Poor-rates might be paid by the landlord ;. they would 
then be a direct tax — None of our taxes on commodities are protective — 
Taxes on commodities must be generally characterised by inequality, 
because they can rarely be made ad valorem — Taxes on commodities are 
generally certain in their amount, and therefore obey Adam Smith's 
second rule — As far as the consumer is concerned, taxes on commodities 
are always paid at a convenient time, and therefore obey Adam Smith's 
third rule-— Some taxes, such as the tax on hops, are obliged to be levied 
from the producer at a very inconvenient time — The convenience of 
Bonding Houses — Taxes on commodities ought, as far as possible, to be 
made consistent with Adam Smith's last rule — Customs duties are most 
inexpensive to levy in an island, because a land frontier is more difficult 
to protect against smuggling— Excise and customs duties should be con- 
fined to a few articles of consumption — The most serious objection 
against taxes on commodities is due to the fact that a tax increases the 
price of a commodity by an amount which exceeds the amount which the 
tax yields to the State — This objection ought to be, as far as possible, 
guarded against; hence a manufactured commodity ought to be taxed in 
preference to the raw material — A tax on a manufactured commodity is 
objectionable, because it necessitates the enforcement of vexatious regu- 
lations by Government officers — It is intended that import and excise 
duties should be paid by the consumers, but an export duty is supposed 
to be mainly paid by foreigners— This, however, rarely happens; such a 
duty usually diminishes the export trade of a country, and thus decreases 
her national wealth — It would be most disastrous for England to impose 
an export duty on silk goods, because, as far as this branch of industry is 
concerned, we should be unable in foreign commerce to compete with 
other countries — The theory of international trade proves the impolicy of 
protective duties — Landowners are the only class that can be permanently 
benefited by protective duties; the value of the natural monopoly which 
they possess may be artificially increased by protection — Protective 
duties cannot, in the long run, increase the profits of any class of traders* 
because the competition of capital equalises profits in different trades— 
The Corn Laws benefited the landowners, not the tenant-farmers — The 
increased prosperity of the country compensates landowners for the abo- 
lition of protective duties ; this illustrated by the rise in the rent of land 
in this country since the passing of free trade — An industry artificially 
fostered by protection may be destroyed by free trade ; but this cannot 
be ultimately a loss to a nation — In Victoria, Australia, a protective 



Contents. xxxi 

tariff is on the point of being introduced ; the mischief of this policy ex- 
plained — A comparison between direct and indirect taxation useless — 
Each system has its peculiar disadvantages; hence equality of taxation 
is best secured by raising the revenue, partly by direct, and partly by 
indirect taxes pages 552 — 57S 

Chapter IY. On the Land-Tax and Poor-Rates. 

The chief part of the revenue of India is raised by a land-tax — A land-tax 
is simply rent — Aland-tax neither diminishes the profits of the cultivator 
nor increases the price of agricultural produce — If a land-tax exceeds a 
rack-rent in amount, the price of agricultural produce must rise, and 
therefore the consumers of this produce will be virtually taxed — The 
importation of produce will be encouraged if the land-tax exceeds a 
rack-rent; hence land will be thrown out of cultivation, and the land- 
tax will yield a smaller revenue — The land-tax in this country is small^ 
because commuted at a fixed money payment — The tax-payers would 
have been benefited if the land-tax had not been thus commuted, but 
had been fixed at a certain definite proportion of the value of the land — 
A tithe may be regarded as a rent-charge, and tithes neither diminish 
the profits of the cultivator nor affect the price of agricultural produce — 
The Tithe Commutation Act not quite fair to tithe-proprietors, because 
tithes are not affected by a rise in the price of stock' — Agricultural im- 
provements may be impeded if tithes are not commuted — Poor-rates are 
in their incidence analogous to a land-tax — The present Poor-law not 
capable of any radical improvement — The benefit resulting from the 
present poor-law is chiefly due to the checks it places upon out-door 
relief — Malthus and others strongly objected to the principle of guaran- 
teeing subsistence to the poor — Their objections were chiefly based on 
the evil consequences which resulted from granting out-door relief too 
freely — Some disadvantages are necessarily associated with the most 
perfect system of poor-law relief; thus a poor-law requires a law of 
settlement, and since poor-rates are parochial, an equalisation of poor- 
rates cannot be attained — The poor are often injured by landlords refus- 
ing to have proper cottage accommodation on their estates, in order to 
diminish the poor-rates — A national poor-rate would be most pernicious, 
because it would be sure to be administered with extravagance — A 
Union-rate would not be so objectionable — Poor-rates, though nominally 
paid by the tenant farmer, are really deducted from the rent of the land- 
owner — This does not hold true with regard to rates which are levied 
upon buildings — The occupier of a house really pays the rates unless the 
house is situated in some special situation, where the number of houses 
that can be built is absolutely limited — Such a situation is Charing 
Cross; in this case rates really fall upon the owner of the land — Poor- 
rates and other rates which are levied upon manufactories increase the 
cost of production; hence these rates are really paid by the consumers of 
manufactured commodities •. 579— 5i*6 



POLITICAL ECONOMY. 

BOOK I. 
PEODUCTION OF WEALTH. 



B 



A^ 



CHAPTER I. 

INTEODUCTORY REMARKS. 



LL those who have studied an exact science must have book i. 

/ ^ PIT T 

JjL experienced the formidable difficulties which ele- ^ 1-^— 

mentary chapters invariably present. The young mathe- -0#c*t% 
matician may well be staggered at the discussions usually elements of 
annexed to the enunciations of the laws of motion; iliQ political 
axioms in his Euclid, which he is told to believe are self- 
evident propositions, offer philosophic questions of such 
complexity, that they continue to form an arena upon 
which the subtlest intellects of the day contend. 

A definition of political economy, and an inquiry into 
the method of investigation that ought to be pursued in 
this science, involve considerations which are sure to per- 
plex the beginner; but the young mathematician need not 
be driven away from his Euclid because philosophy has 
not decided whether axioms are intuitive truths, or truths 
learnt from experience; and in a similar way, the student 
in political economy ought not to have his faith shaken in 
the truths of this science, because he has learnt beforehand 
that political economists still dispute upon questions of 
philosophic method. 

We ask such a student to accompany us with an un- 
biassed mind ; we will promise to lay before him truths of 
great interest and great importance ; we will endeavour to 
render them intelligible to the ordinary intellect, and 
when such a body of truths has been accumulated in the 
student's mind, he will be in a position to understand the. 

b2 



Manual of Political Economy. 

exact nature and scope of the science to whicli they 
belong. 

Prejudices Although it is not advisable in this place to attempt a 
poUtkal precise definition of political economy, yet it is necessary 
economy, to give a general idea of the class of phenomena which 
this science investigates ; and it is all the more important 
to do this, because the vagueness of popular conceptions 
has generated a vast amount of prejudice towards political 
economy. Hardhearted and selfish are the stereotyped 
epithets applied to this science. Ill-defined antipathy is 
sure not to rest long suspended upon a mere abstract idea; 
it seeks some concrete object, and therefore the epithets 
applied to the science are speedily transferred to those who 
study it, and a political economist exists vaguely in the 
haze of popular ignorance as a hardhearted selfish being, 
who wishes to see everyone rich, but who has no sympathy 
with those higher qualities which ennoble the character of 
man. The error of this ignorant prejudice shall be abun- 
dantly exposed in these pages; but we will make a few 
preliminary remarks upon it, in order to convince the 
student that the political economist is not the harsh being 
genemlly portrayed, but that he possesses that information 
which tells him how to improve the lot of his fellow-men. 
He may therefore be the most useful of all philanthropists ; 
because a mere desire to do good without any principles 
of Sfuidance is ever liable to be a futile and a misdirected 
effort. 
Political Political economy is concerned with those principles 
mim^ril^^ which regulate the production, the distribution, and the 
concerned exchange of wealth. 
mthwealth, rjy^^ ^^^^ ^^^^^ ^^^^^ ^^ political economy was called by 

Adam Smith 'The Wealth of Nations;' but political eco- 
nomy is concerned alike with individual and national 
wealth. Those who share the popular error above alluded 
to, make this inquiry, Has a nation no other mission to 
fulfil than to become rich? and should wealth be to the 



hdroductory Remarks^ 



individn^l tlie one absorbing aim of life? But political book 
economy never even gives colour to the suspicion that the 
creation and accumulation of wealth ought to be the great 
object either of a nation's or of an individual's existence. 
The springs of life's action are numerous ; society is held 
together by a vast aggregation of motives and sympathies. 
Wealth is necessary to man's existence ; a great portion of 
human exertion is stimulated by the decreed necessity to 
labour, in order to procure the commodities which main- 
tain life. When, therefore, we endeavour to consider the 
phenomena connected with the production and distribution 
of wealth, we do not wish, in a feeling of opposition, to hut does not 
ignore the other phenomena of man's social existence ; we ^^^^^^^ ^^^ 
isolate this class of phenomena, because the necessities ol than the 
scientific investigation demand it. Every social question, r^^^^-l^^ 
either directly or indirectly, involves some considerations 
of wealth, and therefore has an aspect from which it must 
be considered by political economy. Thus it may be pro- 
posed to extend to the whole nation the system of compul- 
sory education, introduced by the Factory Act. Political 
economy would point out how production in this country, 
and how the wages of the labouring classes, would be 
affected, by compelling every child under thirteen years of 
age, who might be employed in any kind of labour, to 
attend school a fixed number of hours per week. This is 
an aspect of the question which must and would be con- 
sidered, but even if the political economist should prove 
that the production of commodities would be rendered 
more expensive, he might be the first to admit that such 
a loss of national wealth would be abundantly compensated 
by the increased intelligence of the labouring population. 

Numerous other examples might be given which would ^ 

still further prove the complete fallacy of the accusation 
which is so constantly brought against political economy, 
that it is a science which encourages selfishness and 
degrades the best feelings of human nature. If a political 



6 Manual of Political Economy. 

economist considers that the only aim and end of life is 
the accumulation of wealth, then the individual ought to 
be blamed, and not the science which he professes. Poli- 
tical economy if kept within its proper limits does not 
provide a code of social ethics which will enable us to decide 
what is right or ^vrong, and what is just or unjust. It is 
the business of political economy to explain the effect 
which any circumstance such as the imposition of a tax, 
or the enforcement of a particular landed tenure, will exert 
upon the production, the distribution, and the exchange of 
wealth; and it is therefore manifest that political economy 
cannot take account of various other consequences which 
may be independent of any considerations concerning 
wealth. Thus, to revert to our original illustration, the 
principles of political economy will enable us to ascertain 
in what manner the wages of labourers and the production 
of wealth will be affected by a compulsory system of 
national education. Hence the department of this ques- 
tion which belongs to political economy is, as it were, 
separated from those other departments of the question 
which investigate whether or not the morality and the 
social happiness of the people are increased by a system of 
national education. It is therefore a fundamental error 
to suppose that political economy ever asserts that the 
higher motives which actuate human actions ought to be 
discarded in favour of wealth. Some writers on this 
science when discussing social questions may consider only 
that part of a subject with which political economy is 
concerned, and thus the error may be committed of es- 
tablishing general conclusions from an incomplete inves- 
tigation. Hence political economists have sometimes 
appeared to be harsh and narrow-minded, but it is as idle 
upon these grounds to accuse political economy of being 
selfish and hardhearted, as it would be to blame geology 
because an injudicious and enthusiastic geologist pretend- 
ed to despise other branches of physical science. 



Introductory Hemarks. 7 

It must moreover be borne in mind tbat altbongb senti- ^ook i. 

-t ' CH T 

mental moralists may profess to sneer at wealtb as one of > — ^— ^ 
the idle vanities of this world, yet there can be no doubt 
that, even in England, the great besetting evil of the nation 
is the poverty of the humbler classes, and that these people 
cannot make any great social advance until a decided 
improvement has taken place in their material condition. 

We have described political economy as a science which Meaning] of 
is concerned with the production, the distribution, and f '^^^^■, 
the exchange of wealth. But the meaning of wealth, 
though a word of every-day use, will not probably be 
adequately understood without some elucidation. 

Wealth may be defined to consist of every commodity 
which has an exchangeable value. 

The necessity of the limitations introduced into this Exclmnge- 
definition may be readily shown. The air we breathe is of "*^^ '"^^"^' 
course not only a want, but a necessity of life ; yet it can- 
not be regarded as wealth, because its supply is unlimited, 
and it therefore has no exchangeable value. Water very 
generally can be obtained in an unlimited quantity, and 
therefore it is not wealth; but the population of a large 
town would soon absorb all the water which nature spon- 
taneously provides, and therefore water must be supplied 
by artificial means. It then at once possesses an exchange- 
able value, and is justly considered to be wealth. Wealth, 
therefore, is not determined by the nature and quality of 
a commodity, but rather by the circumstances in which 
that commodity may be placed. A gallon of the water 
which flows from the springs at Amwell is not, there, 
wealth; it would be as valueless to sell as a cubic foot of 
air, because there, a supply of water can be as easily ob- 
tained as a supply of air; but that same water conveyed a 
few miles, to the metropolis, produces the large annual 
revenues of the New River Company. 

The character of wealth may be also given to a com- 
modity by the shifting caprice, or by the changing wants 



8 Manual of Political Economy, 

BOOK I. of man. It thus becomes evident that exchangeable value 

^ '^^-^—^ is the characteristic which stamps a commodity with the 

attribute of wealth. 
Various The most striking variations in wealth are exhibited by 

wealth in *^® Same nation in different ages, and by different nations 
different in the Same age. There was a time when Endand was as 

ages and , , . , . . , ^ , 

countries. V^^^ ^^ ^^7 country which IS now consigned to the wan- 
dering savage, and yet she possessed then those same 
natural resources which now so materially contribute not 
only to form but to sustain her present wealth. The 
richest seams of coal were almost unworked, but in those 
remote times her population was in a condition in which 
they could have no demand for coal, and therefore this 
article had no exchangeable value; and that same com- 
modity which is now so valuable, could not then be legiti- 
mately classed as wealth. Hence it is manifest that the 
social condition of a nation and the state of its civilisation 
determine to what extent natural resources may be classed 
as wealth. 

Each stage through which progressive nations have ad- 
vanced from barbarism to civilisation is preserved at the 
present time in some parts of the globe. The savage still 
exists who lives by hunting and fishing; the wandering 
Arabs are true types of the ancient nomad tribes whose 
flocks and herds were grazed on natural pastures without 
the aid of the large supply of food which would be yielded 
even to the rudest agriculture. The village communities 
of the East remain instructive examples of the patriarchal 
type of life; the stereotyped condition of China exhibits 
the features of a remote civilisation. These great differ- 
ences in wealth are partly due to physical causes, but 
they mainly depend upon social circumstances, and as far 
as they do so, form the appropriate topics of political 
economy. The mind of an Englishman so habitually 
contemplates progress, that it is diflicalt to keep in view 
how large a portion of the habitable globe is in an abso- 



Introductory Remarhs. 

lutely stationary state. It is the duty of the political 
economist to explain not only the conditions which deter- 
mine progress in the national wealth, but also the causes 
which tend to make the material state of a country either 
stationary or retrogressive. 

It is even at the present day important to direct careful Erroneous 
attention to an erroneous conception of wealth, which was ^*g^^Jf 
universal until the appearance of Adam Smith's great work, 
about eighty years since. The error when once exposed The mer- 
may appear incapable of misleading a child, yet no error ^^2^^^ 
was ever more tenaciously clung to ; it not only corrupted 
speculative science, but it infected the whole commercial 
policy of every European nation. These errors are asso- 
ciated with the policy which has received the name of the 
mercantile system. The essence of the mercantile system 
was to identify wealth with money. Now the use of money 
is one of the first signs which marks a nation's progress 
from barbarism towards civilisation. Societies even com- 
paratively rude must be impressed with the necessity of 
adopting some medium of exchange. This will be readily 
understood by a cursory glance at the general functions 
which money fulfils. In the first place, money provides 
the measure by which to record the value of each com- 
modity. If, for instance, it is known that a sack of wheat 
is worth twenty shillings, the value of the sack of wheat, 
compared with any other article, can be at once ascertained 
when the price of this last article is known. Money, more- 
over, is not only a universal measure of value, but is also a 
universal medium of exchange. A man may possess a store 
of wheat which he requires to exchange for various other 
commodities; money provides him with the machinery by 
which this can be readily effected. The wheat has simply 
to be sold for so much money, and with this money a 
certain amount of the other commodities required can be 
purchased. But if the use of money did not provide a 
general medium of exchange, the whole transaction must be 



lo Manual of Political Economy. 

conducted by barter; thus, if the individual possessing the 
wheat required a coat, he would have to discover some one 
who was willing to exchange the coat he wanted for wheat. 
Every transaction would under these circumstances be 
conducted by barter. Commerce thus impeded could never 
develope, and society never advance beyond its primitive 
rudeness. But these important functions which money 
performs, engendered in men's minds the fallacies of the 
mercantile system. For the value of every commodity 
being estimated in money, and every commodity also when 
bought or sold being exchanged for money, men soon 
began to mistake the symbol for the reality, and nothing 
was regarded as wealth except money. A nation conse- 
quently tested the utility of its commercial transactions 
with other nations, by ascertaining whether the commerce 
caused money to flow into the country. The whole com- 
mercial policy of a nation was framed with the specific 
object of encouraging the greatest possible accumulation 
of the precious metals. No one would now profess adhe- 
rence to the errors of the mercantile system, but we shall 
have abundant opportunities of showing that they are still 
the secret prompters of many a wide-spread fallacy. The 
consequences of the mercantile system will be further dis- 
cussed in those chapters which treat of money. 

These general remarks upon wealth will enable us at 
once to proceed to the consideration of the production of 
wealth, the first great division of political economy. 



II 



CHAPTER 11. 

THE REQUISITES OF PEODUCTION". 

THE production of every species of wealth requires the 
application of man's labour. The forces of nature^ act- 
ing upon the materials of which the earth is composed, have Requisites 
created products from which wealth is immediately derived. ^£^*'^^"^" 
The seams of coal were deposited without any human 
agency; but the coal is not available to satisfy any of the 
wants of life until man's labour has dug this coal from the 
mine, and placed it in those situations in which it is 
required. But labour, in order to produce anything, must 
have some materials upon which to work. These are sup- 
plied by nature, and may be termed natural agents. The 
steam-engine, for example, is fashioned out of metals, 
deposited as the result of certain forces acting in remote 
geological ages. 

Production, therefore, has manifestly two requisites — Labour, 
labour, and appropriate natural agents upon which this '^^^^^ 
labour may work. But there is a third requisite, the 
necessity of which will, perhaps, not appear so self-evi- 
dent. The casual observer might be very possibly satisfied to 
accept as sufficient the two requisites of production we have 
mentioned; for it might be said. Does not properly trained 
labour, acting upon suitable materials, suffice to produce 
the required commodity? But there is something which is 
requisite to this labour itself The labourer must be fed. 
How can he be fed but by food which has been previously 



12 



and capi- 
tal. 



Capital is 
the result 
of saving. 



Mamial of Political Economy. 

accumulated? This food also required the application of 
labour; therefore, since the labourer must be fed by pre- 
viously accumulated food, a third requisite of production 
is suggested, for some of the results of past labour are 
required to be set aside to sustain the labourer whilst 
labouring. The third requisite of production, therefore, 
is a fund reserved from consumption, and devoted to sus- 
tain those engaged in future production. This fund is 
termed capital. 

The early steps of a student in almost every science are 
met by certain obstacles; if he succeeds in surmounting 
these obstacles, his future progress seems to be insured. 
The young mathematician who obtains a firm grasp of the 
l^hysical conceptions involved in the laws of motion, will 
comprehend with facility problems of apparently great 
mathematical complexity. The questions involved in con- 
sidering the functions of capital, will test a man's capacity 
to master the principles of political economy. Success in 
the study of this science may be regarded as guaranteed to 
all who obtain a clear insight into the nature of capital. 

There are certain fundamental propositions concerning 
capital which should be kept steadily and constantly in 
view. One of these is as follows: — Capital is the result 
of saving. This saving may not be primarily prompted 
with a view of assisting future production. The results 
of labour, however, are not rendered immediately avail- 
able for consumption: the ploughman who ploughs the 
soil must wait for months before the wheat which his 
labour contributes to produce, will be ready for human 
food; but the ploughman must be fed, and he is fed with 
food previously accumulated. The labourers, too, who 
have constructed his plough, must be fed on food which 
has been saved from previous consumption ; for a consider- 
able time must elapse before the harvest can be gathered 
from the soil which the plough has assisted in tilling. 
Capital, therefore, represents all that has been set aside 



The Requisites of Production. 13 

from the results of past labour to assist present or future 
production. It will now be perceived that capital is as 
indispensable a requisite of production as either labour or 
appropriate natural agents. 



14 



r 



CHAPTER III 

LABOUR AS AN AGENT OF PRODUCTION. 



'T is manifest, from the remarks which have been made 

in the previous chapter, that labour is indispensable 

Wealth in- to the production of wealth. As we proceed to describe 

^applicaHon ^^^ purposes to which labour is directed, it will be observed 

of labour that labour creates utilities. Nature supplies the materials, 

but labour fashions these materials, arranges them, places 

them in those situations in which they are required, and 

in fact renders them in every respect suited to satisfy the 

wants of life. 

The greater number of commodities, before they become 

in compli- Serviceable for man, pass through many complicated pro- 

catedpro- cessos, each of which necessitates much complex labour. 
cesses. ' . /-n • 

Trace the cotton seed, first sown m the swamps of Georgia, 

then supplying material to the looms of Manchester. 
Watch the woven cloth transported to the far East, there 
destined to clothe the inhabitants of some remote valley 
of Scinde. Attempt such an examination, and we at once 
become almost overwhelmed with the endless series of 
labourers who have ministered to the production of so 
simple a commodity as a piece of cotton cloth. There 
are the slaves who cultivate the cotton plant in Georgia, 
and prepare it for exportation. The cotton has to be 
brought to the port. Shipwrights must have constructed 
the ships which carry the cotton from America to England ; 
sailors must navigate these ships ; dock-labourers are re- 
quired to unload the cotton ; the railway on which the 



Labour as an Agent of Production, 1 5 

cotton is carried from Liverpool to Mancliester has been book i. 
constructed by the industry of numerous classes of labourers ; v- — 1^ — ^ 
and the cotton, before it is woven into cloth, passes through 
the hands of a succession of workmen whose skill is as- 
sisted by machinery — ^to the creation of which almost 
every class of labourers has contributed, from the collier 
to the skilled and thinking mechanician; every one may 
also be regarded as an important participator in the work 
who has, by his saving, contributed to the accumulation of 
the capital by which the industry of the labourers has to 
be sustained. We are quickly carried into endless rami- 
fications if we attempt to ascertain the labour which has, 
either directly or indirectly, assisted in the production of 
an apparently simple commodity. 

Although no wealth whatever can be produced without Productive 
labour, yet there is much labour which does not contribute ductive 
to the creation of wealth. Hence, labour is divided into ^^f^^ur. 
two great classes, productive and unproductive labour. 
This is a distinction which, in name, is familiar to those 
who have not studied political economy. 

Before the characteristics which distinguish productive Functions 
from unproductive labour are explained, it will be neces- 
sary to revert to our primary conception of wealth. Nature, 
as has been before remarked, supplies the materials. Man 
is powerless to create any material object; he combines 
substances together which would never be combined with- 
out his interposition, and thus creates a product which 
nature could never construct without his aid. Man takes 
the wheat and puts it in that situation where it will be 
ground; with the flour he mixes a certain quantity of 
water and yeast, and when he has brought the mixture 
within the influence of the requisite heat, a loaf of 
bread will have been made. It is through the agency of 
man's labour that these utilities are embodied in material 
objects which give them their exchangeable value. For 
instance, the utility which man confers upon coal is to 



1 6 Manual of Political Economy. 

BOOK I. place it in those situations in whicli it may be required. 
> — 1^ — L' There can be no doubt, therefore, that all that labour is 
m confer- productive which confers utilities upon material objects. 
tksclirecthj Such is the labour of all ordinary workmen. Agricul- 
tural labourers, manufacturing operatives, bricklayers, &c., 
must all be manifestly ranked as productive labourers. 
All those, too, who are employed in transporting mer- 
chandise from one place to another, are productive labour- 
ers, for they confer upon commodities the utility of being 
in the place where they may be required. The labour of 
policemen and others who are engaged in protecting in- 
dustry is productive, because they confer upon commodities 
the important utility of security. But even the labour 
of productive labourers is not unfrequently unproductive. 
Public works have been commenced and abandoned ; the 
labour which was bestowed upon these is of course wasted. 
A railway was constructed from Chesterford to Newmarket ; 
it was closed almost from the first; there is now no chance 
of its being reopened, for the company has commenced 
reselling the land to its original proprietors; and thus the 
labour of even the most useful workmen may be unpro- 
ductive. 
or^in. There is also labour which is eminently useful, but 

directly, which, however, does not directly contribute to the pro- 
duction of wealth. As an example' of this, it may be 
mentioned that, not many years since, the uneducated 
labourer was considered as efficient as the educated la- 
bourer, and employers were heard to regret those days 
when there were no schools to corrupt the industrial vir- 
tues of the workmen. When such opinions were current 
the labour of the schoolmaster must have been considered 
entirely unproductive, because it would have been supposed 
that, even if he did not interfere with, he certainly did not 
promote the efficiency of the labourers, regarded as mere 
machines for the production of wealth. But now facts are 
every day coming to light which must impress us with 



Labour as an Agent of Production, 17 

the conviction tliat the schoolmaster may occupy a most 
important position in the material economy of the nation. 
Even to manual labourers a properly developed mind is as 
essential as a well developed body; and there can be no 
doubt that he who contributes in any manner to improve 
either the physical or intellectual condition of the people 
takes no unimportant part in assisting the nation's wealth. 
Much labour, therefore, which at first sight may seem 
unproductive will appear, on further consideration, to 
exert an indirect influence upon the production of wealth. 
Popular notions attach a certain stigma to unproductive 
labour. No doubt, waste of any kind is to be deplored ; 
but we should not be too prone to regret that so much 
labour is devoted to provide the pleasures of life, for the 
happiness of a nation may be in some degree estimated by 
the time and labour which can be spared for enjoyment, 
and even the labour of those who provide these enjoyments 
is not altogether unproductive ; a man will work with more 
vigour and efficiency if his mind can be diverted from the 
routine toil of life. 

From these remarks we are able to deduce a precise Definition 
definition of productive labour. The definition ^iven ofp^y- 
by Mr. Mill, and the one which is usually accepted, labour. 
is as follows: — 'Productive labour is that which pro- 
duces utilities fixed and embodied in material objects.' 
According to this definition, the labour of the teacher is 
unproductive from whose instruction a mechanic acquires 
his skill. And yet the skill of our workmen ought to be 
classed as wealth, because the loss of this skill would 
diminish the wealth of the nation, as much as if she were 
deprived of a great amount of material wealth. If, how- 
ever, the skill of the labourer is classified as wealth, we 
strain the use of the word wealth beyond its usual accepta- 
tion, because wealth is always popularly conceived to be 
something material. We will therefore adopt the following 
definition: — Productive labour is that which either di- 

c 



1 8 Manual of Political Economy. 

BOOK T. rectly or indirectly produces utilities fixed and embodied in 
V ^H-^"i- ^ material objects. According to this definition, the labour of 
the teacher who imparts skill to the mechanic is productive, 
for by this skill wealth is created — or, in other words, 
utilities are embodied in material objects, and therefore 
the labour of the teacher indirectly produces these utili- 
ties, and his labour must consequently be classified as 
productive. The definition, moreover, obviates the neces- 
sity of running counter to popular language, for this is 
undoubtedly done if we denominate as w^ealth such an im- 
material object as the skill of a mechanic. 
Productive For the purposes of political economy, there is another 
^uctivecon- ^^i'^^^ii^ction, as important as that between productive and 
sumption, unproductive labour. Much of that which is produced is 
destined to be wasted, or to be consumed unproductively. 
The wants of those who never contribute, either directly 
or indirectly, to the wealth of the nation must be supplied 
by the results of productive labour ; and hence a portion 
only of the results of productive labour assists in the 
formation of new wealth. Consumption, therefore, as well 
as labour, may be either productive or unproductive. 

Although the entire consumption of unproductive la- 
bourers must be unproductive, yet it does not follow that 
commodities are always consumed productively by pro- 
ductive labourers. For instance, even the poorest labourers 
in this country purchase some luxuries which they could 
abstain from, without in the slightest degree diminishing 
the efficiency of their labour. All such purchases, therefore, 
even if made by the most productive labourers, denote 
unj)roductive consumption. 

The distinction between productive and unproductive 
consumption will assume considerable importance in the 
remarks we are about to make upon capital. 



19 




CHAPTEE lY. 

OF CAPITAL. 



E have already explained that capital is as indis- book i. 
pensable a requisite of production as either labour -- 



or appropriate natural agents. A very little consideration Definition 
will render it evident that labourers, whilst engaged in^/cap^to. 
any particular industry, cannot live upon the commodity 
which their labour is assisting to produce. The plough- 
man who tills the soil from which, in the following 
autumn, the harvest will be gathered, is fed with the 
wealth which his master has saved; or, in other words, the 
master pays his labourer's wages from the wealth which 
he has previously saved. The production of wealth, 
therefore, cannot proceed unless some of the wealth 
previously produced has been set aside from immediate 
consumption. The wealth which has been accumulated 
with the object of assisting production, is termed capital; 
and, therefore, the capital of the country is the wealth 
which is not immediately consumed unprod actively, and 
which may, consequently, be devoted to assist the further 
production of wealth. This is a wide definition, but it is 
correct and sufficiently definite until the subject has been 
more fully elucidated. 

In the general introductory remarks upon wealth. Fallacy of 
particular attention was directed to that current id^diCj l^'^^pital 
which confounds money with wealth. The student, in with money, 
obtaining his primary conceptions of capital, is not un- 
frequently confused by a similar fallacy. Capital, like 

C2 



20 Manual of Political Economy. 

BOOK I. otlier wealtia, is estimated and expressed in money. Hence 
. ^^;^^- . the idea is -encouraged that capital consists of money, to 
the exclusion of any other commodity; although, perhaps, 
adhesion would not often be professed to such a proposition 
when stated in plain terms ; yet, when the error can be 
partially concealed in some of the difficulties of compli- 
cated questions, it will be found to vitiate the speculations 
of many a pretentious thinker. Capital, let it again be 
borne in mind, is all that wealth, in whatever shape or 
form it may exist, which is set aside to assist future pro- 
duction. It is true that if, for instance, you ask a farmer 
how much capital he has with which to work his farm, he 
will reply that he has so many thousand pounds, but his 
capital is not actually in money, and even if it was in 
money it could not fulfil the functions of capital until 
the money had been exchanged for various commodities. 
For why does a farmer require capital to work his farm? 
He requires capital because implements and stock are 
wanted, and because he must have money, or, some other 
property in hand which he converts into money, in order 
to pay the wages of his labourers; and although a farmer 
estimates his capital in money, he obtains the amount of 
this estimate by ascertaining the pecuniary value of 
various items of which his capital is composed. In 
making this calculation, he takes account of the value of 
his stock, his implements, and the amount of money 
which it is necessary for him to keep in hand in order 
to pay his wages, and to provide the outlay which is 
requisite for other purposes. 
Capital not It has been just stated that the whole capital of any 
tmUm-' country is the sum of the wealth existing in any shape or 
ployment. form whatever which has been set aside with the object of 
being devoted to assist future production. Hence it is 
manifest that the whole capital of the country is not at any 
particular time actually employed. This may be readily 
explained by an easy illustration. 



Of Capital, 21 

Let us consider some commodity sucli as wlieat, which is book t. 

produced in our own country, and to simphfy the matter > ? ' ^^' - 

we will suppose that the wheat of one harvest is consumed 
by the time the next harvest is gathered in. Now it may 
be naturally asked, what portion of this wheat ought at 
anytime to be regarded as constituting capital? Immedi- 
ately the harvest is gathered in, the wheat is of course 
so much wealth, and at that time just so much of the 
wheat as each individual owner intends to employ produc- 
tively is capital. But this affords no correct estimate of 
the quantity of this wealth which will be ultimately em- 
ployed as capital. The intentions of the individual owners 
may change; he who to-day intends to devote to produc- 
tive emploj^ment so much wealth as is represented by a 
certain quantity of wheat in his possession, may next day 
resolve to squander it on unproductive consumption, and 
therefore, to speak correctly, the amount of the capital of 
a country varies from day to day, on account of the shift- 
ing caprice of individuals. It has been supposed that the 
whole of this wheat will have been coDsumed when the 
next harvest arrives, and then the exact quantity of the 
wheat which has been employed as capital would of course 
be known, if the portion of it which had been devoted to 
productive purposes could be ascertained. 

A difficulty may here very probably suggest itself, ^ difficulty 
which it is very important should be cleared away. A ^n ^^g 
prime necessary of life such as wheat is never to any large wAea« in 
extent wasted or squandered luxuriously; the great bulk camtcdt 
of it being always devoted to satisfy the most necessary 
wants of life. It may therefore be asked. Should not all 
the wheat which a country possesses be regarded as a por- 
tion of its capital, when it is consumed as usefully as any 
commodity can be? A prodigal farmer may sell his wheat, 
and squander the money which he obtains for it, but the 
wheat will not be wasted, and therefore it might be very 
plausibly urged that the individual owner of a commodity 



22 Manual of Political Econoimj. 



BOOK I. like wheat does not prevent it being productively employ- 
^ \ ' ■ ed, or, in other words, has not the power of determining 
whether it shall or shall not form a portion of the capital 
of the country. We have thus gradually found our way to 
a difficulty. The subject of capital cannot be considered 
under too many aspects; it is here that the young student 
in political economy finds himself most beset with difficulty. 
He will never become familiar with the fundamental prin- 
ciples of capital by exhibiting them in the form of propo- 
sitions; they had better be suggested to him by following 
out some illustration. An adequate grasp is never obtain- 
ed of the physical principles of mechanics, until the stu- 
dent has solved problems for himself. 

The' case suggested is this. Suppose the farmers re- 
solved to sell half their wheat, and spend the money 
upon their own enjoyments; the money for which one- 
half the wheat is exchanged would be thus employed 
unproductively. Ought this wheat to be regarded as 
capital? Yes — is the answer which will very probably 
be given. It is true that the money for which the wheat 
is sold is employed unproductively, but this will not in 
any degree prevent the wheat being devoted to useful 
purposes. The wheat will still be made into bread, and 
will be consumed in just the same manner as it would 
have been if the farmers devoted the money for which it 
was sold to productive purposes, instead of squandering it 
Thatpor- on their own enjoyments. But suppose the farmers had 
twn which jeyQ|g(j t}iig xnoney for which the wheat was sold to pro- 
changed for diUGtiYQ purposes; by just that amount would the capital 
nou-apital ^^ ^^ country be increased. The money for which the 
wheat is sold is not itself consumed ; this money is devoted 
to purchase commodities, and if they are consumed un- 
productively, an amount of wealth equal in vahie to the 
quantity of wheat first exchanged is consumed unpro- 
ductively, instead of being devoted to increase the capital 
of the country, and thus assist the future production 



Of Capital. 23 

of wealth. Now our argument implies that when un- book r. 
productive consumption is spoken of, a tacit assumption 
is made that the money for which the wheat has been 
sold is employed, in great part, to purchase luxuries. 
But luxuries, it may be said, naturally imply waste, and are 
not devoted to assist the production of wealth. Hence, 
all that portion of the wealth of a country which consists 
of luxuries can never be productively employed, and, 
therefore, can never be made to form a part of a nation's 
capital. It may, therefore, be asked, Can a farmer be said 
to diminish the capital of a country, if he does not waste 
his wheat, but simply sells it to others who will take good 
care to use it properly, and employs the purchase-money 
in buying luxuries for himself which never could be 
used as capital, since, if they were not consumed unpro- 
ductively by him, they would be so by some other person, 
because it is assumed that the consumption of luxuries can 
render no assistance to the production of wealth? It 
might, therefore, appear that wealth is diverted from 
forming a part of the capital of the country rather by 
those who produce luxuries, than by those who consume 
them; it must, however, be borne in mind that the 
demand of the consumer, and not the arbitrary caprice of 
the producer, determines the particular commodities which 
are manufactured. Luxuries, and other articles which 
cannot be devoted to reproductive employment, would not 
be brought into the market if it were not for the demand 
of the consumer. Enough has now been said to establish 
the proposition that an individual increases the capital 
of the country, not by spending his wealth on his own 
enjoyments, but by devoting it to reproductive employ- 
ment. This is only another corroboration of what has 
been already stated, namely, that capital is the result of 
saving. For when wealth is saved, it is not hoarded, but 
invested"; it is then productively employed, and as a conse- 
quence at once assumes the functions of capital. 



24 Manual of Political Economy. 

The proposition just enunciated, that an individual 
diminishes the capital of a country by spending his wealth, 
A demand and increases the capital of the country by saving it, will 
iZodiUes is ^^^^ ^^ ^^ another equally important proposition, and one 
notade- which is sometimes announced as a startling paradox. 
labour ^^^' ^® shall be able to deduce, from our previous re- 
marks, that a demand for commodities is not a demand 
for labour, or, in other words, that he who spends his 
wealth upon his own indulgences gives no additional 
employment to the labourer; the labourers are benefited 
by those who save, and who are eagerly anxious to accu- 
mulate wealth for themselves. These opinions, however, 
are entirely opposed to popular notions. The spendthrift 
is half excused, and often receives the homage due to a 
popular favourite, because, although he injures himself, 
yet it is supposed that he benefits the community in 
general. The virtues of prudent saving meet with no 
such kindly reception; if there is national distress, the 
capitalists have first to bear the brunt of national indig- 
nation. We will endeavour to- explain away such miscon- 
ceptions. 

We must revert to our original definition, that the 
capital of a country is that portion of its wealth which is 
appropriated to reproductive purposes. But if wealth is 
so appropriated, it must be employed in assisting those 
who produce wealth. But the producers of wealth are 
the labourers, therefore capital remunerates the labourers, 
or in other words, the capital of a country is the fund out 
of which the labourers are paid their wages; the greater, 
therefore, the capital is, the larger will be the fund which 
is to be distributed amongst the labourers. Returning to 
This pro- our previous illustration, we will consider two cases. In 
position il- ^YiQ first place, let it be supposed that a farmer sells a 

lustratedby . ^ ^ ' , ^^ 

&n example, certain portion of his wheat, say one half, and spends the 
amount upon his own enjoyments. He afterwards ceases 
to do this, and converts the amount he previously spent 



Of Capital. 25 

into capital, employing it in paying labourers. In what 
manner will this change in the farmer's course of conduct 
affect the labourers? In the first case, the farmer may 
spend the money upon such enjoyments as luxurious living 
and expensive wearing apparel. Let one item of his 
extravagance be taken. Suppose it be 50?. paid to his 
tailor for expensive cloth. The manufacturer of this 
cloth has employed so many labourers, and if there was 
no demand for it, the labourers engaged in its manufac- 
ture would be thrown out of employment ; and, therefore, 
it would appear that the purchaser of 601. worth of cloth 
causes just the same demand for labour as if he had paid 
this bOl. to labourers whom he himself employed. But 
there is a further consideration. When the cloth is con- 
sumed, so much wealth is destroyed ; the wearing of the 
cloth has given gratification to the purchaser, but has not 
in any way assisted the future production of wealth. So 
much wealth has been destroyed without any reproductive 
result. But if the 50?., instead of being laid out in cloth, 
was paid directly to labourers, different results ensue, for 
then, after the 50?. has been consumed by the labourers, 
there will be something left ; there will be the result of 
their industry, which will represent so much wealth. And 
thus the wealth of the country will be increased. But 
we have yet to examine whether any different consequences 
will ensue to the labourers themselves. It will probably 
be thought that the labourers, as a body, will be in the 
same position as they were before ; and that the same 
amount of wages will be distributed amongst them, be- 
cause since there is now not so great a demand for cloth, 
fewer labourers will be employed in that department of 
industry ; and that the loss to labourers employed in 
making cloth will be compensated by the farmer employ- 
ing more labourers in agriculture. This is, undoubtedly, 
true ; but if there is less demand for cloth, less will be 
manufactured. The cloth manufacturers will restrict their 



26 



Manual of Political Economy. 



BOOK L 
CH. IV. 



A further 

'illustra- 
tion. 



business, tliey will have to employ less capital in it than 
they did before ; they will, therefore, be able to spare a 
portion of their capital for other investments ; nothing 
has occurred to make these manufacturers more extra- 
vagant, and therefore they will be anxious to seek some 
proiitable employment for that portion of their capital 
which is now set free from their own business. This 
capital will still, therefore, be employed productively; 
but if it is employed productively, it must still continue 
to perform the functions of capital, or, in other words, 
must be devoted to pay the wages of labourers engaged in 
some productive employment. - Hence a greater demand 
must be caused for labour if an individual, instead of 
purchasing commodities for his own enjoyments, employs 
the money to pay the wages of the labourers. The pro- 
position that a demand for commodities is not a demand 
for labour, is a proposition which is perhaps more rarely 
understood than any other in the whole range of political 
economy. Let us, therefore, endeavour to exhibit its 
truth in a still stronger light. The truth of the propo- 
sition shall be tested by the most extreme case which even 
an opponent can suggest. 

Let it be supposed that a person has a certain amount 
of property in the form of some useful commodity ; that 
he sells a portion of it, 50^. worth, with which he purchases 
some useless luxury, such as lace. If it is correct that a 
demand for commodities is not a demand for labour, then 
the purchase of this lace ultimately does no more good to 
the labourers than would be done if the individual wantonly 
destroyed the property which has been sold in order to 
purchase the lace. If such a wanton destruction of pro- 
perty occurred, the demand for lace would be proportion- 
ately diminished, and, as we have before mentioned, the 
result of this diminished demand would be, that the lace 
manufacturer would employ less capital and less labour in 
his trade ; but he would be anxious to make use of the 



Of Capital, 27 

capital which was thus set free from his business ; he book i. 
would seek for it some profitable investment : it would ■ ^^'/^l_r 
therefore be not wasted, but continue as capital, or, in 
other words, would still be appropriated to pay the wages 
of labourers. Hence the capital of the country, and, 
therefore, the fund which is distributed amongst the la- 
bourers, is not in any way diminished if an individual 
should wantonly destroy so much wealth, instead of con- 
suming it unproductively for his own gratification. It is 
therefore evident that demand for commodities is not 
demand for labour, and that, consequently, an individual 
increases the wealth of the country, and improves the 
condition of the labourer, not by spending, but by saving. 

There still remains another case to be considered. We Another 
have shown, in the above example, that the owner of^^^^" f% 

_ ' ^ Jr J ^ pLoyment of 

capital neither increases the wealth of the nation nor unproduc- 
benefits the labourers if he spends his wealth unpro- ^^^sSZl 
ductively upon his own enjoyments. But how will the productwe 
wealth of the nation, and how will the condition of the fi^^Z^' 
labourers be affected, if an individual employs his wealth wecdth com- 
in paying the wages of unproductive labourers ? Suppose ^^^^ 
that the 50Z., which in the above example purchased lace, 
was now devoted" to paying labourers engaged in carrying 
out some useless work — such, for instance, as digging an 
artificial lake; this change in the mode of spending money 
would benefit the labourers, because by it the amount of 
money distributed amongst the labourers, or, in other 
words, the wage-fund, would be increased by 50^. As far 
as the labourers, therefore, are concerned, there is an 
important difference whether wealth is consumed unpro- 
ductively or whether it is spent in maintaining unpro- 
ductive labourers. The unproductive consumption of 
wealth benefits the labourers as little as if the wealth was 
wantonly destroyed. But when wealth is spent in paying 
labourers for doing unproductive work, then the labourers 
are, in the first instance, as much benefited as if the wealth 



28 Manual of Political Econoyny. 

BOOK I. was devoted to productive industry. This must be so, 
CH. IV. "because the same amount is distributed amongst the la- 
bouring classes. But the ulterior consequences which 
result from the productive employment of capital are very 
different, for when capital is productively employed the 
wages which are consumed by the labourers cause a repro- 
duction of wealth; therefore, in this case, the wealth of a 
nation is increased, and there is a greater fund from which 
future capital may be saved. Hence, if we summarise our 
remarks on this subject, it is evident that there are three 
cases : — 
General 1. A man may spend money on luxuries ; then capital 

discussion. IS consumed m simply giving him pleasure. 

2. A man may spend capital on unproductive labour ; 
then capital is consumed in simply giving food to la- 
bourers. 

8. A man may spend capital on productive labour; then 
capital is not only reproduced, but also gives the same 
amount of support to the labourers as in the second case. 

The propositions just established afford an instructive 
proof that a knowledge of even the first elementary chap- 
ters of political economy shows the futility of the reproaches 
which ignorance casts upon this science. ' It is stigmatised 
as encouraging selfishness ; but the selfish man devotes his 
means to his own indulgences, and political economy proves 
that such an one cannot claim the excuse of benefiting the 
labourers by causing a demand for the products of their 
industry. 
TJiese con- The propositions of political economy are necessarily 
elusions are gomewhat abstract, and cannot be rendered familiar to the 

tn practice ^ ' ^ 

modified hy reader without illustrations. It is important to make these 
pllxitv'of illustrations appear as practical as possible ; and, although 
cominercial there is nothing at all improbable in the cases we have 
actions above supposed, yet the affairs of commercial life are com- 
plicated by other considerations which we cannot conve- 
niently take account of, until we have further advanced 



Of Capital, 29 

into our subject. We have supposed the case of an book t. 
individual who, having been accustomed to purchase 50Z. > ^^-J^- ^ , 
worth of lace, ceases to buy the lace, in order to employ 
the money in paying the wages of labourers. But to this 
it may be objected that political economy is not concerned 
with a single farmer or a single manufacturer, but ought 
rather to investigate the economy of a nation. But the 
result cannot be altered if the transaction we have supposed 
occurred between a great number of farmers and manufac- 
turers, instead of between single individuals. Again, it 
may be remarked that, when discussing the above example, 
it was stated that when individuals cease to buy lace, in 
order to employ more labourers, the lace manufacturers 
would, in consequence of this diminution in the de- 
mand for lace, restrict their business, and would em- 
ploy less capital in it. But it may be said that we 
have omitted to consider the losses which must always 
occur, both to the manufacturers and to their operatives, 
•when their particular branch of industry suffers a check. 
Upon this point, however, we will make an observation, hut are still 
which should be carefully borne in mind throughout our ^■^^^^^^• 
illustrations. The results which are deduced from the 
principles of political economy do not come into immediate 
operation. These principles indicate and afl&rm tendencies 
to produce certain results, which will inevitably in time be 
realised, if not counteracted by other causes. Thus a 
diminution of demand, such as we have imagined, has 
recently occurred in the Coventry ribbon trade; and no 
doubt the ribbon manufacturers cannot immediately trans- 
fer their capital to other departments of industry, nor can 
their operatives immediately find an equally remunerative 
employment: but still, if the ribbon trade is to remain 
permanently crippled, the Coventry manufacturers will 
gradually transfer all their capital to other investments, 
and the Coventry operatives will be gradually drafted off 
to other employments. Such a transfer of capital and. 



30 Manual of Political Economy. 

labour cannot, however, be made without some sacrifice. 
Machinery, as will be shown in our remarks upon fixed 
capital, is an important part of the capital of a country ; 
and the machinery employed in a ribbon manufactory 
would be almost valueless if it was sold to be used for 
some other purpose. The ribbon weavers, too, would be 
much less valuable labourers, because their acquired skill 
vfould not be so efficient in a different kind of industry. 
We must proceed gradually to take account of all these 
and other more complicated considerations. At the com- 
mencement of our subject it is necessary to take the most 
simple cases; but even this elementary treatise will pro- 
vide the student with the requisite data fully to solve 
economical problems of much complexity. 
Capital is In the course of this chapter it has been frequently 
wasteTor remarked that capital is the wealth which has been appro- 
empioyed priated to assist future production. Wealth so appropriated 
Uvdv' consists of machinery, stock, implements, and a fund out 
of which the wages of the labourers are provided ; but the 
capital of the country is not always employed at the great- 
est advantage, or, in other words, the capital of a country 
might always administer to the production of a greater 
quantity of wealth than is actually produced. Capital is 
wasted through want of skill ; inferior machinery is fre- 
quently used ; industrial enterprises, after having involved 
a heavy outlay, are often finally abandoned. Capital, from 
other reasons, too, never contributes all the assistance it 
might to the production of wealth. The wages of labourers 
paid out of capital are generally sufficient to provide some- 
thing more than the necessaries of life. The worst paid 
classes of labourers probably spend some small portion of 
their wages in luxuries, the consumption of which does not 
assist, but perhaps rather interferes with, the efficiency of 
their labour. The advocates of Temperance profess to fur- 
nish abundant statistics upon this point. We are assured that 
the working-men of this country annually spend 3,000,000^, 



Of Capital. 3 1 

upon tobacco. If it can be proved that tobacco does not book i. 

• CH IV 

benefit, but injures both the body and the mind, then • — ^ — _. 
3,000,000^. of the capital of the country, which in the 
first place is paid to the labourers, and then expended 
by them in tobacco, is, considered as capital, rendered 
completely nugatory; because the 8,000,000^. in no 
way assists the production of wealth. If, moreover, it is 
true that tobacco cannot be used without detriment, then 
this 3,000,000^. of capital not only does not assist, but 
actually is an obstacle to the production of wealth. But 
it will perhaps be said, although this sum of money spent 
upon tobacco does the labourer no good, yet it is not with- 
out its beneficial influence; the expenditure of so much 
money is good for trade, and thus the labourer receives an 
indirect advantage. The fallacy of such a supposition 
will be readily understood by recalling the proposition we 
have been so careful to explain, namely, that a demand for 
commodities is not a demand for labour. It is, however, 
necessary to be extremely cautious in expressing an opinion 
as to whether the consumption of a particular article in 
any way does the labourer good. The relations betv/een 
chemistry and physiology are as yet by no means settled. 
The theory of food is most imperfectly understood. A 
chemical analysis may very possibly show that such an 
article as tea contains none of those ingredients which are 
commonly considered to nourish the human frame; and 
hence a rash and ignorant assertion is often made that tea 
is not a necessary of life, and that therefore a heavy tax 
upon tea is no hardship to the labourer; the tax is simply 
a salutary sumptuary law, because the consumption of tea 
ought rather to be discouraged than encouraged. But al- 
though tea may not nourish the body, yet it undoubtedly 
soothes the mind, and this is equally important; for 
without some such soothing influence, life would be almost 
intolerable, and even the body itself would be wasted by 
the weariness of the mind. 



32 Manual of Political Economy. 

BOOK I. Enough has now been, perhaps, stated to establish the 
. ^' , ' ■ proposition that although industry is maintained by capital, 



yet that there is always in a country sufficient capital to 
support more industry, or, in other words, to administer 
to the production of a greater quantity of wealth than 
that which is actually produced. 
Fears of a Intimately connected with this portion of the subject of 
emdtalare capital there is a very wide-spread misconception that there 
based upon would be a glut of capital if it were increased beyond a 
muconcep- QQ^tsim point ; in fact, that capital might be so augmented 
that no industry would be foimd upon which it could be 
employed. Therefore, a certain waste of capital is consi- 
dered necessary in order to prevent such a glut. Now, it 
has been explicitly stated that capital is the result of sav- 
ing, and therefore if capital is increased, the increase must 
be due to greater saving. Let it therefore be supposed 
that the rich spend much less upon luxuries, and resolve 
to employ labourers with the money thus saved. It may 
be imagined that if such saving were continued, our various 
industrial marts would soon be overstocked, and that ware- 
houses would be filled with goods for which there was no 
demand. There are few even amongst political economists 
who do not sometimes write and speak as if they believed 
that the unproductive expenditure of the rich is required 
Anincrease to give adequate employment to the poor. But if such an 
of capital iji(;j.gase of capital as that described should occur, two 

might ac- ^ ^ . . 

company an suppositions may be made: anincrease of population pro- 
*or7^ta^^ portionate to the increase of capital may occur; or, 
tionary secondly, the population may remain the same as it was, 
^ovulation before the increase of capital commenced. 

The first case presents no difficulty; the increased capi- 
tal would be required to support the increased population. 
But the second case must be carefully considered, and it 
at once suggests this difficulty: If all the labourers were 
previously fully employed, how could the increase of capital 
give additional employment to labourers ? 



Of Capital. 33 



A particular point, which may be keenly disputed in an book i. 
abstract science, such as political economy, is frequently < — I — '-^ 
completely obscured in the ambiguities of general language ; In either 
and, of this, the question under discussion affords a striking S^^^^^^S^ 
example. It therefore becomes very necessary, as a pre- glut are 
liminary process, to attribute a distinct meaning to -tj^e ^^^S'**^^^^/- 
above expression, — 'giving additional employment to the 
labourers.' The augmentation in the capital of the country 
has been supposed to result from the diminished consump- 
tion of luxuries on the part of the rich. It is assumed that 
all the labourers were previously fully employed. But a 
new fund, which is now intended to be paid to the labourers, 
has arisen from the increased savings of the rich ; where, 
therefore, are the labourers amongst whom this increased 
fund is to be distributed ? Those labourers, it is true, who 
have manufactured the luxuries which the rich now no 
longer purchase, will be thrown out of employment. But 
the capital of the manufacturers of these luxuries will 
be now seeking fresh investments, and will be therefore 
sufficient to give employment either directly or indirectly 
to the same number of labourers as were previously main- 
tained by it, and therefore the new capital created by the 
increased savings of the rich still apparently remains un- 
employed. But although the assumption has been made 
that all the labourers were previously fully employed, yet 
let us consider what this means. It must be interpreted 
thus : That all able-bodied labourers were able to find 
work, and that they received certain wages for a certain 
quantity of work. There can be no doubt but that the 
labourers would willingly receive more wages if they 
could be obtained. It is quite impossible that the wages 
can be increased unless the capital is increased; now, 
however, there is such an increase of capital, and there- 
fore the wages of the labourers will rise. If the labour- 
ers were before supplied with all the necessaries of life, 
they in their turn will begin to consume more luxuries, ' 



34 Manual of Folitical Economy, 

BOOK T. and the labour whicli before had produced luxuries for the 
en. IV. . . . . 

' — ^v — ^ rich is now available to meet this new demand on the part 

of the labourer. It may, however, be argued that if the 
capital continued in this way to increase, the labourers' 
wages would also be constantly increasing, and at length all 
their wants might be satisfied. When such a happy event 
was consummated, then the hours of toil would be shortened, 
and men would not be compelled to labour so ceaselessly 
as at the present time. Human beings are not endowed 
with an uncontrollable instinct for physical exertion ; it has 
been beneficently ordered that the wants of life must be 
satisfied by physical labour, but civilisation has no nobler 
mission to fulfil than to diminish the labour which is re- 
quired to satisfy the physical wants of life. Hence the 
vaunted progress of civilisation must appear delusive to 
that great majority of the human race who toil for hire, 
and who have not yet found that the hours of their toil 
have been lessened. 

Generations after generations pass away whose minds 
remain undeveloped, and whose bodies have had to work 
with the constancy and the regularity of a machine. Poli- 
tical economy will assist us in understanding the means 
by which the labourer's toil is to be lightened. Let it not 
then be called a harsh or degrading science, for no study 
can elevate our conceptions with brighter anticipations for 
the future than one which will enable us to comprehend 
some of the. requisites which will afford, to a greater num- 
ber, that only true and most supreme happiness — the 
development of the human faculties to a harmonious and 
consistent whole. 
Capital Since capital is the result of saving, it is often errone- 

wmtlecon- Q^^Y considered that capital is wealth which is set aside 
order to With the object of not being spent ; but this is a funda- 
'fundions ^^^^^^ misconception, for capital cannot fulfil any of its 
functions except by being consumed. Thus, capital pro- 
vides the fund from which the wages of labour are paid, 



CH, IV. 



Of Cajpital. 35 

and these wages are, of course, consumed in ministering to ^^^^ i 
the wants of the labourer, and in supplying him with all 
the various necessaries of life. If a man has so much 
wheat, it is wealth which may at any moment be employed 
as capital ; but this wheat is not made capital by being 
hoarded; it becomes capital when it feeds the labourers, 
and it cannot feed the labourers unless it is consumed. 
These considerations apply to capital existing even in a more 
permanent form, such as machinery. All machines must 
in time gradually wear out; a steam-engine, durable as it 
may appear, is only capable of performing so much work ; 
but a steam-engine is capital, because it assists the produc- 
tion of wealth, and therefore it only fulfils the functions of 
capital when it is in motion ; but every hour that it is kept 
in motion contributes somewhat to its ultimate wearing 
out. It is therefore manifest that all the wealth of the 
country, in whatever form it may be, can only perform the 
functions of capital by being wholly or partially consumed. 
The capital of a country is constantly being consumed in 
order to produce more wealth, and therefore capital is 
maintained by perpetual reproduction, and not by hoarding 
and keeping wealth out of consumption. 

The leading propositions with regard to capital have 
now been discussed, and they afford principles which will 
enable us to investigate economic problems of the greatest 
interest and importance. An endless variety of such pro- 
blems bearing upon the subject of capital may be readily 
suggested, and the student should zealously apply himself 
to their solution. Let him not suppose that he is wasting 
time upon the mere rudiments of the science ; he may rest 
assured that, if he fully comprehends the subject of capital, 
his future successful progress in the science is insured, and 
that he will become one of tha,t very select few who can 
apply the principles of political economy even to those 
simple financial and social questions which are the topics 
of everyday discussion. 

D2 



36 Manual of Political Eco7io7ny. 

BOOK I. It will be, perhaps, -Qseful to our readers if we give one 
*_. or two practical applications of the laws of capital which 



Practical have been enunciated in this chapter. One such applica- 
^Vth^e^^ tion is suggested by considering the rapidity with which 
principles, a country recovers from the ravages of a disastrous 
war. This phenomenon was first fully elucidated by Dr. 
Effects of a Chalmers. A conqueror overruns a country, and destroys 
every vestige of accumulated wealth which he can discover. 
A great portion of the food with which the labourers were 
to be fed is gone ; machinery and other appliances with 
which industry is assisted are destroyed. The capital of 
the country appears to be almost lost, and when it is re- 
membered that the future production of wealth depended 
upon this capital, it might be supposed that production 
would cease, and that the country must for years remain 
the same desolate waste. But, on the contrary, countries 
which have been thus ravaged and pillaged, have in a few 
years revived, and seemed to be as prosperous as before. 
The history of Athens and the French Wars in the Pala- 
tinate afford many striking examples of a raj^id recovery 
from the devastation of war. The anomaly admits of a 
very simple explanation. It has been shown in this chap- 
ter that the capital which at any time exists in a country 
is always sufficient to administer to the production of a 
much greater amount of wealth than that which is pro- 
duced ; or, in other words, the production of wealth which 
actually takes place might be effected with the aid of much 
less capital than the amount which is applied. There, 
therefore, always exists a considerable excess of capital 
which might be wholly destroyed without necessarily im- 
peding the production of wealth. For instance, every 
shilling of the labourer's wages which is expended upon 
anything but the mere necessaries of life might be de- 
stroyed without affecting the industrial efficiency of the 
labourer, and consequently without diminishing the future 
production of wealth. If, therefore,, in a country ravaged 



Of Capital, 37 

by war, there should be just enough food left for the book i. 
labourers to live upon until the next harvest is gathered ■ — U-1-' 
in, and if also they had the necessary agricultural imple- 
ments, there^ is no reason why the country should not soon 
be restored to its former fertile and well cultivated appear- 
ance. But if the implements of agriculture were destroyed, 
cultivation could not proceed until they were replaced; 
and the after consequences of the war would be more 
permanently disastrous. 

As a nation advances in commercial prosperity, a con- Commer- 
stantly increasing quantity of national wealth assumes a gresHn- 
permanent and fixed form. The docks, the railways, our creases the 
unsurpassed mercantile navy, the great manufactories Qf ^^'*^^^^^^- 
Lancashire and Yorkshire, with their machinery as costly 
as it is ingenious ; these works, and not the food and cloth- 
ing stored in our warehouses, are the striking evidences of 
England's marvellous commercial progress. If all the food 
was destroyed except just enough to prevent the people 
starving, England in one year might present an unchanged 
aspect of commercial prosperity; for if the food was not 
ruthlessly wasted it is stored for the purpose of being con- 
sumed. But if the fury of an invader should ever range 
unrestrained over these islands, and should destroy the 
wealth which exists in a permanent form, such as public 
works, machinery and buildings, then the disaster could 
not soon be repaired, and England would suffer for a far 
longer period than did poorer nations, conquered, in more 
backward times. Hence war becomes more terribly dis- 
astrous to a nation as each year a greater proportion of 
her wealth is accumulated in a more permanent form. 
Let us hope, then, that commercial progress may carry with 
it guarantees for the permanence of peace. Of late years 
a feeling of false humanity has attempted to make war 
subserve the rights of private property. Life may be sacri- 
ficed with as much prodigality as ever. The foremost 
geniuses of this mechanical age devote their energies to 



38 Manual of Political Economy, 

perfect the weapons of death; but civilisation, it is said, 
demands that there should be no wanton destruction of 
property. ISTo such attempt to palliate the material disas- 
ters of war ought to be encouraged ; war will be rendered 
less frequent, if a whole nation is made to feel its terrible 
consequences, instead of concentrating all the horrors in 
the sacrifice of thousands of helpless victims who may be 
marshalled at the caprice of a despot. If any nation 
should ever threaten Eng^land with invasion, Ensjland oug^ht 
to Speak in unmistakable language that her vengeance 
should not be confined to a retributive slaughter of 
soldiers, but that she would destroy all the public works 
upon which the wealth of the nation mainly depended. 
This will give a practical check to vaunting ambition, and 
might rouse a nation to restrain the military designs of the 
most despotic ruler. 
Slioidd This digression suggests a consideration of the much 

paid for ly debated financial question, vv^hether any extraordinary na- 
Loans or tional expenditure, such as is caused by a war. oug^ht to be 
taxation^ defrayed by a loan or by increased taxation? England has 
resorted to loans, and a permanent record of this financial 
policy is afforded by a national debt, larger than the aggre- 
gate amount of the debts of all other European nations. 
Mr. Gladstone in his budget-speech of 185-^ evoked the 
enthusiasm of the House of Commons by the declaration 
that the future financial policy of England was to be re- 
versed. The expenses of the Russian War were to be 
.defrayed entirely by increased taxation, and thus posterity 
would inherit the advantages of that contest, unencum- 
bered with the penalties of augmented pecuniary burdens. 
The virtuous resolution of Parliament was not or could 
not be maintained, and the Russian War added 50,000,000^. 
to our permanent debt. It would be foreign to our im- 
mediate subject to discuss to what an extent the present 
generation is justified in burdening future generations; 
there can however be no doubt that the whole of the 



Of Capital. 39 

money required for the Eiissian War might have been book i. 
raised by taxation. England's capacity for taxation is ex- > — X— ^' 
traordinarily great compared with that of other nations, 
and it has never in later years been severely tried. A loan 
may be obtained from two sources; it may be taken from 
the capital of the country, or it may be provided from in- 
creased savings. If capitalists consider that the terms 
offered by the Government afford an eligible investment, 
they may be induced to take some of the capital em- 
ployed in various commercial undertakings, and lend it 
to the Government. If the Government spends the loan 
at home, the loan has not diminished the capital of 
the country; it has merely caused a portion of it to be 
diverted to other purposes. But although the capital of 
the country is not in the first place diminished, in all pro- 
bability such a diminution v/ill soon ensue. The Govern- 
ment will ordinarily spend the loan in warlike weapons. 
Cannon balls, gunpowder, and mortars are commodities 
which cannot be appropriated to assist the future produc- 
tion of wealth, labourers cannot be fed by them, and there- 
fore when the loan is converted into such commodities it 
cannot form a portion of the capital of the country. If, 
however, the capital which has been contributed to the loan 
had remained with its original possessors, it would in the 
undertaking in which it was employed,, in all probability, 
contribute to the production of some useful commodities 
which might afterwards be applied as capital. Upon such 
an hypothesis therefore, the capital of the country is dimi- 
nished in consequence of the loan; the labourers will 
ultimately suffer, because since there is less capital there 
will be a smaller sum to be distributed amongst them. 

As a second hypothesis, let it be supposed that the loan Loans ap- 
is obtained in the same manner, but is differently employed ^(^'^J^-/'' 
by the Government. Yfithin the last few years large loans icorhs. 
have been raised for the purpose of carrying out industrial 
works in India. By these loans railyfaj^s have been made, 



40 



Manual of Political Economy, 



BOOK I. 
CH. IV, 



and irrigation works have been constructed on a stupend- 
ous scale. In this manner the loans have been devoted to 
purposes of great industrial usefulness, which will, in all 
probability, render more assistance to the future production 
of wealth than if the money had remained in the hands of 
those who lent it to the Government. A loan thus applied 
may be raised without any injury to the labourers, and 
may at the same time permanently enrich a country. A 
loan, however, is very rarely contributed entirely out of 
money which had previously been employed as capital. A 
portion of it will be generally provided from increased 
savings. All that is supplied from this source will mani- 
festly serve to augment the capital of the country ; in this 
manner a loan may encourage the accumulation of capital, 
or, in other words, may benefit the labouring classes. The 
employers would not share the advantages thus enjoyed by 
the labourers, because the Government, having become 
the employer of a larger number of labourers, the demand 
for labour would be increased, and other employers would 
have to give their labourers higher wages. It may be with 
reason urged that a nation cannot be impoverished by the 
Loans ap- unproductive expenditure of a loan which is provided out 
producthe' ^^ i^^creased savings, because, since savings are increased, 
purposes, it must be assumed that if the loan were not raised the 
money would not be applied as capital, but would be spent 
unproductively by individuals; and therefore it may be said, 
Why should the unproductive expenditure of a government 
impoverish a nation more than if the same amount of wealth 
was spent unproductively by individuals? In one sense, 
no doubt, a nation is not rendered poorer, as may be shown 
from the following considerations: Suppose, for instance, 
we wish to make an estimate of the whole wealth of the 
English nation. All the wealth possessed by Englishmen 
in the funds should be omitted from this estimate. If it 
were not so, the same wealth would be counted twice over. 
Suppose A has a mortgage of 10,000^. on B's estate. The 



Of Capital. 41 

mortgage is wealth to A ; but it is not a part of the nation's 
wealth, because the mortgage simply shows that B's estate 
is not entirely his own property, but that A has a share of 
it, the value of which share is equivalent to the amount of 
the mortgage. Similarly the fundholders have a mort- 
gage upon the industry of the nation; and if the fund- 
holders were all English, and the nation repudiated its 
debt, the wealth of the country would not in the slightest 
degree be either decreased or augmented : a most unjust 
confiscation of property would be perpetrated, but there 
would have been no destruction of wealth ; for what the 
fundholders would lose the tax-payers would gain. The 
national debt, considered in this aspect, is a mortgage 
upon the industry of the nation ; and the creation of a 
mortgage cannot diminish the wealth of a nation unless 
the persons who own the mortgage should be foreigners, 
when, of course, a portion of the national wealth is as it 
were transferred to another country. These considerations 
show that if the raising of a loan encourages money to be 
saved, the loan might be spent in the most unproduc- 
tive manner possible without in any way diminishing the 
national wealth. There is, however, a difference in the 
consequences which result when money is spent unproduc- 
tively by individuals, and when the same money is sub- 
scribed to a loan, which loan is spent unproductively by 
Government. In the first case, where individuals spend 
the money unproductively, no one has to pay them any- 
thing for doing so ; but in the second case, where these 
individuals lend the money to the Government to be spent 
unproductively, the whole nation has annually to pay 
a certain penalty in consequence of this unproductive ex- 
penditure. The penalty paid is the interest received by 
the lenders of the loan. 

In estimating the effects of a loan we have these general Effects of 
principles to guide us : The loss of the labourer is in pro- ^^^"^ T 
portion to the extent to which the loan encroaches upon 



42 Manual of Political Economy. 

tlie capital of tlie country. A loan may increase the capital 
of a country either by encouraging greater savings, or by 
inducing capital to be subscribed to the loan from other 
countries. In this case the labourer may receive an imme- 
diate benefit, proportioned to the increase of capital caused 
by the loan. Indian railways have been constructed by 
loans subscribed almost entirely in England. It has been 
calculated that 11,000,000/. has been paid to the natives 
of India for their labour upon railways ; and, since this 
amount was imported capital, the labouring population of 
India derive the same immediate advantage asif 11,000,000Z. 
had been distributed in gratuities amongst them. If, then, 
a loan in any way causes the capital of the country to be 
increased, the labourers will receive immediate benefit, 
even if the loan is spent unproductively ; on the contrary, 
the employers will, under the same circumstances, suffer a 
loss, because wages will rise as a consequence of the capital 
being increased. India affords a striking example of this ; 
for the large sums of money raised in England, and spent 
within the last few years upon the public works of India, 
have caused the w^ages of the labourers in that country to 
rise in a very marked manner. 

The ultimate effects of a loan to all classes depend en- 
tirely upon the manner in which the loan is spent. If it 
is spent unproductively, the whole nation will have to 
pay a permanent penalty for the extravagant expendi- 
ture. If it is devoted to works of industrial usefulness, 
which probably would not be carried out by private en- 
terprise, then the nation may be enriched to an extent 
which it is difficult to calculate. Who can tell how much 
India has been enriched by her Ganges Canal and her 
Grand Trunk Road ? These are some of the public works 
which will serve to remind posterity of the achievements 
of the greatest commercial company the world has ever 
seen. 

In quoting warlike material as an example of an unpro- 



Of Capital, 43 

ductive expenditure on the part of Government, it is booki. 
intended to express no opinion adverse to military prepa- ^-2S,iIl>, 
rations. Vast sums have been, and will probably again 
be squandered in war ; but there can be no greater impedi- 
ment to the production and accumulation of wealth than 
a want of security from hostile attack ; and therefore it is 
absolutely necessary, even for the interests of commerce, 
that the defences of the country should be adequately 
maintained. 

Let us now examine what different consequences ensue Wfct of 
if an increased expenditure is supplied by taxation instead \noZyhy 
of by loan. Increased taxation would be obtained in taxatimiin- 
different ways in different countries. In our own country Iq^L 
there are probably only two sources available for largely 
augmenting the revenue. These are the income-tax and 
an increase of the duties upon some commodities of general 
consumption, such as tea and suga-r. Let it be supposed 
that recourse is had to both these expedients. An income- ^^ income- 
tax may be paid in two ways; it may be paid out of income, ^outofm- 
or it may be paid out of capital. Thus a manufacturer come, does 
who is charged with 1,000^. additional income-tax, may labom-s- 
pay the amount by increased saving, or, in other words, by 
diminishing his personal expenditure. If this is done, his 
capital is in no way affected, and therefore the labourers do 
not suffer ; the important thing for them is that no en- 
croachment should be made upon capital. But it will 
perhaps be said, that if the people who pay the increased 
income-tax are induced to retrench their expenditure, trade 
Avill suffer in consequence of their purchasing fewer com- 
modities, and that the labourers will thus be injured be- 
cause dull trade is always prejudicial to them. But here 
we must once more recall the important proposition, that 

demand for commodities is not demand for labour : if, 

* 
therefore, the income-tax is paid from income and not out of 

capital, the labourers may derive a very decided advantage 

from increased taxation, because a portion of the money 



44 Manual of Political Economy, 

which is thus obtained by the Government is sure to be 
employed as capital, since it will be paid in wages to 
artizans, shipwrights, and other classes of labourers engaged 
by the Government. The advocates of a democratic exten- 
sion of the suffrage not unfrequently urge, in its behalf, 
that the people would have a direct interest in checking a 
reckless expenditure, and they also urge that it is the 
interest of the rich in opposition to the poor to encourage 
heavy taxation. But the labourers will in every way be 
greatly profited by increased expenditure if the money is 
provided by an income-tax, which is sure to be partly 
supplied from increased economy, and which in this country 
*/ paid out it has never been proposed to levy upon the labouring 
mjures^the Papulation. If an income-tax is paid out of capital, 
labourers, the production of wealth is at once interfered with ; but 
the labourers are only injured in proportion to the extent 
to which the Government spends it otherwise than in 
employing labourers at home. In a country so rich as 
England, even an income-tax of two shillings in the pound 
would probably in the main be paid out of income, and not 
out of capital. Such a tax, therefore, would not seriously 
interfere with the production of wealth, but would most 
materially encroach upon the means of enjoyment, of all 
who pay it. In the richest country, if an income-tax con- 
tinues to be increased, it must at length cease to be chiefly 
paid out of income. Directly it encroaches upon the capital 
of the country, the tax becomes doubly burdensome and 
disastrous, the production of wealth will be gradually 
impeded, the position of the labourers must be rapidly 
deteriorated, and the finances of the country will be 
gradually brought into a most critical state. In a poor 
country, such as India, an income-tax is a much more 
hazardous expedient. India is poor because sufficient 
capital has not been applied to develope her great re- 
sources. The best opinions agree that an income-tax 
would in India be in part paid out of capital, and therefore 



Of Capital. 45 



its imposition in that country could only be justified by book i. 
extreme necessity. 



Unless, however, there should be a democratic extension Effect of 
of the suffrage unchecked by the proper restraints, in- ^^^J! 
creased taxation will always be raised in this country as it dities. 
is now, partly by an income-tax, and partly by augment- 
ing the duties imposed upon commodities of general con- 
sumption. During the Russian War the income-tax was 
raised from sevenpence to one-and-fourpence in the pound, 
and the duty upon tea from a shilling to one-and-fivepence 
per pound. No article, except bread, is in this country so 
universally consumed as tea ; it is prized alike by the rich 
and the poor. Those who in old age drag out their lives 
on the miserable pittance provided by the parish, will stint 
themselves of bread and fuel rather than be unsoothed by 
their cup of tea. None of those consequences accompany 
a tax on tea, which may arise from a tax which in any way 
affects the capital of a country. But a tax on tea reaches 
every cottage in the land, and the poorer the individual is, 
the more, probably, is the tax felt. If England were engaged 
in a very expensive war, and determined to pay the whole 
cost without the assistance of a loan, an income-tax would 
no doubt supply a great proportion of the increased revenue. 
When a commodity is taxed, its consumption is diminished ; 
and there are even at the present time some commodities 
in this country from which a greater revenue could not be 
obtained by increasing the duties now levied upon them. 
Spirits, for instance, will not bear a heavier tax than the 
present one of ten shillings pei; gallon. 

We have now pointed out some of the effects which Objection 
follow both from loans and from increased taxation, and ^^. ^^?f ^' 

' , mz. that 

there can be but little doubt that loans ought to be avoided they tend to 
as far as possible. A loan, however, is perfectly justifiable. ^^^^^^?_ 
when it is necessary to resort to so high an income-tax nemlly^ 
that it must in great part be paid out of the capital of the 
country. In such a case the production of wealth is at 



46 



Manual of Political Economy, 



hit not in 
varkibJy. 



once impeded. If we had to decide between a loan and 
taxation as a mere abstract question concerning the pro- 
duction of wealth, there would be little hesitation in decid- 
ing against the loan, because a loan would generally be 
paid more entirely out of capital. It is, however, im- 
possible to frame a general maxim which will apply to 
every case. Political economy vnll supply the principles 
which will suffice for each case, as it may occur. Thus, if 
a war should break out in India, it would be extremely 
impolitic to defray its cost by a loan if the money for the 
loan was subscribed in India, because the loan would thus 
abstract so much capital from India, and, as we have before 
remarked, India not only requires all her own capital, but 
works of the greatest industrial importance cannot be 
carried out until more foreign capital is imported. An 
Indian statesman would, however, have good reasons to 
prefer the loan, if it could be raised in England, for the 
loan would be the means of bringing capital to India. As 
the loan is intended to support a war, a great portion of it 
would, no doubt, be spent unproductively in India; but a 
considerable sum would be applied as capital in paying 
the wages of various classes of labourers who are always 
called into active employment by military preparations. It 
is also quite possible that, in order to assist some of the 
operations of the campaign, roads might be improved and 
bridges built, and in this manner a warlike expenditure 
might cause works of permanent commercial utility to be 
constructed. As a consequence of this loan, the revenues 
of India would be charged v/ith a certain annual payment, 
but such an annual charge might be paid out of income, or 
at any rate would not cause the same diminution in the 
capital of India, as if the loan had been in the first place 
entirely provided by Indian capitahsts. 
Agmeral These discussions upon the relative advantages and dis- 
^tlmitwn. ^^'^^'^^^^^^ of loans and taxation will show the importance 
of arranging a tax so that it should cause the least possible 



Of Capital, 47 

diminution of capital. It is, therefore, extremely impolitic sook i. 
to tax a raw material. Suppose it were determined to ^ — ^^— ^ 
raise a certain sum by taxing cotton ; a tax on cotton goods 
would be far preferable to a tax on raw cotton. If a 
manufacturer was obliged to pay 100?. upon a certain 
quantity of raw cotton, he would thus have to give to the 
Government 100?. which he intended to employ as capital, 
and therefore the tax would be entirely taken out of capital. 
But suppose the Government said, We will let you manu- 
facture your cotton, and then you shall pay us the same 
amount, by levying a tax upon the manufactured goods. 
The result of the tax would be, that the price of cotton 
goods would rise, the manufacturers would be able to pay 
the tax out of the increased price obtained for their 
goods, and the tax would not, under these circum- 
stances, in any degree diminish the capital of the manu- 
facturers. 

It will have been remarked, that every kind of wealth C^rcuJct- 
which in any way assists the production of wealth has ^^g,^ ^aiw- 
been, in this chapter, described as capital. Capital, there- ^^^• 
fore, is not confined to the food which feeds the labourers, 
but includes machinery, buildings, and, in fact, every pro- 
duct due to man's labour which can be applied to assist his 
industry ; but capital which is in the form of food does not 
perform its functions in the same manner as capital that is 
in the form of machinery: the one is termed circulating 
capital, the other fixed capital. This is a real distinction, 
from which many important consequences follow. Circu- 
lating capital is only used once in order to fulfil any 
particular purpose; fixed capital may continuously repeat 
the assistance which is lent to industry. A store of food 
fulfils the functions of capital when it feeds labourers, but 
in feeding the labourers it is consumed ; it cannot repeat 
the service which it has rendered. But the same looms, 
set in motion by the same steam-engine, will continue to 
weave cotton cloth through a long succession of years. 



48 Manual of Political Economif. 

BOOK I. The same ploughs till the land for many successive crops. 



CH. IV. 



The capital with which a road is made does not facilitate the 
transport of wealth for any limited period ; but, if a slight 
sum is spent to keep the road in repair, it will permanently 
serve the same industrial purposes. The capital expended 
on the great irrigation works of India, may, through count- 
less ages, fertilise the same tracts of land. Circulating 
capital, since it is destroyed by one use, must receive an 
immediate return; the application of fixed capital is 
rewarded by industrial advantages continued for a long 
period of time. A farmer expects that each successive 
crop will remunerate him for the wages he has paid 
during the current year. But if he purchases a steam 
thrashing machine, he does not expect that his outlay will 
be returned to him in one year; he hopes to use the 
machine for a great number of years, and thus he will be 
gradually repaid for his original outlay. As another ex- 
ample, raw material is circulating capital to a manufac- 
turer; the raw cotton is only once woven into cloth; and 
the manufacturer, when he sells the cloth, is repaid for 
the sum which he has expended in the raw material. But 
the money which he has invested in fixed capital — such 
as the machinery used in his manufactory — is gradually 
returned to him. A portion of the difference in the value 
between raw cotton and the same cotton when woven into 
cloth correctly estimates the pecuniary value of the assist- 
ance rendered by the machinery in the manufacture of this 
cloth ; and a repetition of this valuable assistance ultimately 
remunerates the manufacturer for the original cost of the 
machinery. When the capital which administers to the 
production of any wealth is entirely circulating, the amount 
of wealth produced must in value be at least equal to the 
capital emplo3^ed ; for since this capital, according to our 
hypothesis, is circulating, it is entirely consumed by one 
use, and therefore the particular industry could not be 
remunerative unless the value of the wealth produced was 



Of Capital. 49 

somewhat more than sufficient to replace the capital con- 
sumed. All capital, as we have before said, is intended 
to be, either sooner or later, consumed : circulating capital 
is destroyed by once ministering to the production of 
wealth; but capital is maintained by reproduction. Hence, 
since circulating capital implies immediate consumption, 
circulating capital must also necessarily imply immediate 
reproduction. Fixed capital, however, may repeat for a 
long period the assistance it renders to production; fixed 
capital, therefore, is only gradually consumed, and the 
amount of wealth expended upon fixed capital is not 
immediately reproduced. The most important practical Practical 
consequences follow these considerations. Let it be sup- ^^"s«- 

11 '111 n 'iT'ii quences of 

posed that a considerable amount 01 capital, which has the distinc- 
been previously employed as circulatino;- capital, is con- i](^'>^f^i'^^f^^ 

■•• , J 1 J or' ^ jixed and 

verted into fixed capital ; when employed as circulating circulating 
capital it was at once reproduced, and therefore the wealth ^^-P^^^^- 
which this capital produces must at least be sufficient in 
amount to enable the capital to be re-created. But the 
same immediate reproduction of wealth does not take 
place if the capital is converted into fixed capital; and 
therefore there need not immediately be produced so large 
an amount of wealth as if the capital were consumed by a 
single use, and had, in consequence, to be at once repro- 
duced. Now, labourers derive their wages from circulating 
capital; hence, if the circulating capital is diminished, 
their wages will temporarily fall. As an example, the 
construction of a railway may cause circulating to be con- 
verted into fixed capital. Suppose that 10,000,000Z., 
previously paid to agricultural labourers, is now paid to 
railway labourers: the agricultural labourers would con- 
sume their wages; but then their labour would at once 
produce something which would be again consumed, and 
which would be again employed as circulating capital. 
The railway labourers will be as iisefuUy, or even more 
usefully, employed than the agricultural labourers. The 

E 



50 Manual of Political Economy. 

BOOK L nation is not made poorer by this transfer of capital from 
- ^^'/ ^' > one industry to another; she has her railway instead of 



the commodities which were produced by the capital pre- 
viously invested in agriculture. There is no diminution 
of national wealth ; but there may be less wealth in the 
country available for consumption — a smaller fund, in 
fact, to distribute amongst the labourers, and therefore 
A tempo- the labourers may temporarily suffer. The application of 
wS Telm^ improved machinery and the construction of such works - 
ilicted upon as railways will ultimately confer upon the labourers an 

labourers -, . ^ nn • , , i ii r> 

ly the con- advantage amply sumcient to compensate them lor any 
mrsio7i of temporary loss which they may suffer from the conversion 
into fixed of circulating into fixed Capital. Railways and machinery 
capital, have most powerfully stimulated the production of wealth, 
and a large amount of wealth has been produced by their 
aid which could never have been produced without them. 
Moreover, the capacity which exists in England for the 
accumulation of capital quickly repairs any encroachment 
that is made upon her circulating capital; and therefore 
it is doubtful whether the labourers in this country have 
been even temporarily injured by the extensive use of 
machinery, and by the rapid development of our railway 
system. Although the labourers have not been injured 
especially by this cause in England, yet the labourers of poorer and 
'^countries- ^^^^^ backward countries might suffer seriously under 
similar circumstances. If the English Government con- 
structed railways in India by loans subscribed for in that 
country, it would be reasonable to ' suppose that some of 
the capital so subscribed had previously been employed as 
circulating capital. An Indian farmer might say. The 
terms offered to me by the government are so good, that Ii: 
shall get a better return for my money by lending it to thell 
government than by employing it on my farm. The con- 
sequence would be, a smaller production of food; the 
circulating capital would be diminished, and therefore 
there would be a smaller fund to distribute amongst the 



Of Ca^pital. 51 

labourers. The injury to tlie Indian labourers would, 
however, only be temporary; the production of wealth 
would be so much assisted by the railway, that India hut it will 
would soon possess even a larger circulating capital than .^Q^I^^i. *^^' 
before. 

A rapid conversion of circulating into fixed capital 
may thus for a time very prejudicially affect the labourers. 
Their prejudice against machinery is not, therefore, alto- 
gether unfounded; they probably, however, would be as 
unable to give satisfactory reasons for their antipathy as 
those would who deride their ignorance. Mankind may 
reasonably expect much happiness from the perfection of 
mechanical appliances; but if posterity is to gain so much, 
it is not unreasonable that the poor should, if possible, 
receive some practical sympathy when these great pro- 
spective advantages are accompanied with temporary 
suffering to the labouring classes. 



e2 



52 



CHAPTER V. 

ON THE PRODUCTIVE POWER OF THE THREE REQUISITES 

OF PRODUCTION. 

BOOK I. rilHE three requisites of production, labour, appropriate 

> ^\ ^' ' I natural agents, and capital, have now been discussed. 

Variations The subject of the production of wealth will not be com- 

^ductivV^' piste without an investigation of some of the laws upon 

power which depend the amount or degree of productiveness of 

each of these requisites. All the materials upon which 

labour and capital are employed, are produced either 

directly or indirectly from the land. Wool is not a 

product of the land like cotton and timber, but the sheep 

from which the wool is clipped are fed by food obtained 

from the land. Land, labour, and capital are, therefore, 

the three requisites of production. The most casual 

observer will have noticed that each of these varies 

greatly in productiveness at different times, and in dif- 

ofland, ferent places. Some of the richest tracts of land in 

England were not long since an uncultivated morass; 

Cambridgeshire and Norfolk are now amongst the largest 

corn-producing counties, yet Cambridge was once the 

home of the bittern and snipe, and Norfolk was little 

better than a rabbit-warren. And at the present time 

England possesses land of every degree of fertility; the 

rich loam land of Sussex and the Lothians will let for 

4?. an acre; the wild moors of Yorkshire, if given to a 

farmer rent free, would not pay to be cultivated. There 

labour, is also the greatest difference in the efficiency of labour. 



Va7'iaiions in Productive Poiver. 53 

It has been calculated that an English mower will do as book i. 

much work in a day as three Russian serfs, and the con- • ^^— ^ 

tractors for the French railways found that an English 
navvy was worth two French labourers. Such differences 
in the value of labour mainly depend upon superior 
strength and stamina, but still greater differences arise 
from superior skill ; many operations in the manufacture 
of commodities require, perhaps, a delicate touch or a 
quick dexterity which no amount of untrained labour 
could supply. Capital, directed by superior knowledge, o,nd capi- 
may effect what before was impossible ; mines are now 
worked which no amount of labour and capital, unaided 
by the steam-engine, could have drained ; and the appli- 
cation of a hundred times as much labour and capital 
would not produce the cloth which is now woven by the 
spinning-jenny and the power-loom. These considera- 
tions may, perhaps, suggest the opinion that we shall be 
obliged to call in the assistance of every science in order 
to investigate the laws which determine the productiveness 
of land, labour, and capital. For it may be said, agri- 
cultural chemistry makes known the constituents upon 
which depend the fertility of the soil ; the difference in 
the stamina and strength of English and Russian labourers 
must be elucidated by appealing to physiology, as well as 
to the laws of climate, race, and other sciences. Again, 
the efficiency of machinery must be explained by the 
principles of mechanics. It, therefore, manifestly becomes 
necessary to place some limitation upon the scope of 
political economy, unless it is intended to embrace a vast 
number of other sciences. Now, it will be remembered, 
that no accurate definition of political economy was 
attempted to be given at the commencement of this work. 
It is far better that the reader should have the definition 
evolved for him as the subject gradually progresses. 

In the introductory chapter to this work, we described A mcesmr^ 
political economy to be the science which investigates the *^" " *^^ 



54 Manual of Political Economy, 



BOOK I. laws that determine the production, the distribution, and 

CH. V. 1 . 

' — l-J— / the exchange of wealth ; it was, however, at the same 
of our en- time stated that this was rather a general description 
l^hTcauseof^^^^^ an accurate definition. It was not an accurate 
thisvaria- definition, for we already perceive that, even concerning 
the first branch of the subject, political economy does 
not investigate all the laws which concern the production 
of wealth ; for if it did investigate those laws, chemistry, 
physiology, mathematics, and various other branches of 
knowledge, would form a part of the science of political 
economy. It will be necessary to place some limit upon 
our investigations ; and the necessary limitation is pro- 
vided by assuming that the facts which are acquired from 
other sciences are known, or at any rate are supposed to 
be true. Thus political economy assumes all that we can 
tell at the present time with regard to the fertility of the 
soil. It is not the business of political economy to decide 
whether chemistry can suggest any particular manure 
which will greatly increase the productiveness of the land ; 
but if the land, by any such cause, is rendered more 
fertile, then political economy would trace the conse- 
quences of this increased fertility upon the production, 
the distribution, and the exchange of wealth. Again, it 
would be foreign to the subject of political economy to 
prove, by a physiological argument, the causes upon 
which the inferior strength of the French and Russian 
labourers depends ; but political economy, assuming that 
this inferiority exists, without explaining its cause, or 
suggesting a remedy for its removal, traces the conse- 
quence of this inferiority upon the production, the dis- 
tribution, and the exchange of wealth. We thus obtain 
the limitation required, and the following more accurate 
definition can now be given : — Political economy is the 
science which investigates the laws of the production, the 
distribution, and the exchange of wealth, so far as these 
laws depend upon the human mind. 



Variations in Productive Power, 55 

Keturning now to the immediate subject of this chapter; book i. 
we have to consider the productiveness of land, labour, — — J.,; , 
aiid capital, not as they depend on physical causes, but as 
they are determined by production on a large and small 
scale, by division of labour, by the accumulation of capital 
in joint-stock companies, and by various other such circum- 
stances which we shall proceed to notice. 

The productiveness of land does not depend entirely The pro- 
upon its fertility ; for the quantity of labour and capital ^f falcT^^^ 
which may be required to make the produce raised from 
the land available for consumption forms a very important 
element in estimating its productiveness. The rich allu- 
vial plains of the Mississippi are almost unsurpassed in 
fertility ; but a considerable portion of the wheat which 
is grown there is consumed in Europe ; and the cost of 
carrying this wheat to the European markets is virtually 
so much deducted from the productiveness of the soil 
upon which the wheat was grown. When the valley of the 
Mississippi possesses population so dense as to consume all 
the wheat there grown, the land, although it may be 
not more fertile, will be more productive of wealth ; for 
the wheat will no longer be wanting an utility, which, 
amongst others, gives it the character of wealth, namely, 
of being in the place where it is required to be consumed : 
an utility which cannot now be conferred upon it without 
considerable cost. Everything, therefore, which facilitates Ms affected 
the transport of produce, increases the productiveness oi^^'^^r^ "^^f 
land. A great, perhaps the greater portion of the most transport- 
fertile land in the world, is entirely unproductive. Pro- ^^^^e^^' 
ducts might be raised from it which would be eminently 
serviceable to man, but various obstacles interpose which 
render these products unavailable for consumption. Primae- 
val forests may grow the most valuable timber, but man 
never uses this timber ; for although no price in the first 
place may be paid for the timber, yet the cost of carrying 
it to the place where it will be required exceeds its value. 



56 Manual of Political Economy. 

The increase of population may create a demand for a pro- 
duct, and thus make the land from which it is obtained 
more productive. The great natural pastures of Australia 
have for many years supported immense flocks of sheep. 
In England the carcase of a sheep is far more valuable than 
its wool ; but the reverse was the case in Australia — the 
wool was valuable, the carcase was worthless. Wool is not 
a bulky commodity, and the cost of sending a fleece from 
Australia to England is comparatively trifling ; but so great 
a quantity of meat was almost worthless to so sparse a 
population. The gold discoveries at once caused the popu- 
lation of Australia to be largely increased ; the mutton 
which had been before wasted was now required; the sheep 
became much more valuable ; and the pastures upon which 
the sheep graze thus become far more productive of wealth, 
although the fertility of these pastures has remained un- 
changed. 
The pro- If the productiveness of labour is estimated by the amount 
ofTahour^ of wealth which is produced by a certain quantity of labour, 
then the productiveness of labour is partly the cause and 
It is af- partly the effect of the fertility of the land. Quantity of 
the fertility ^^^^ur may be conveniently defined by the labour of a 
of land, certain number of men working for a certain number of 
hours per day. The amount of wealth which is produced 
depends jointly upon the productiveness of land and the 
productiveness of the labour employed ; but as remarks 
have already been made upon the productiveness of land, 
we shall now proceed to consider some of the causes upon 
which, under any assumed set of circumstances, depends 
the productiveness of labour. 
ly national Energy and intelligence are two of the most valuable 
c taracUr, qualities which a labourer can possess. It does not, as has 
been previously observed, appertain to our subject to at- 
tempt a full explanation of the causes which determine 
differences of national character. The Irish labourer, for 
instance, does not possess that steadiness and dogged de- 



Variations in Productive Power. 57 

termination whicli distinguish the English labourer. This book i. 
inferiority in the Irish labourer is popularly attributed to ^ '^i 
his Celtic blood : but the Irish have no doubt been too 
poorly fed to be capable of sustained energy. If the Eng- 
lish had for a few generations hved on the impoverishing 
diet which the Irish have used, the points of difference 
between the two races would undoubtedly be much less 
striking. The Irish have been badly fed and badly paid, 
because there has been little capital in the country. The ^y t^^ *'^- 
principles of political economy, however, explain the means capital, 
by which the capital of the country may be increased, and 
thus a remedy is suggested for improving the energy of 
the labourer. 

Labourers have generally been so imperfectly educated a.nd hy the 
that the economical advantage of intelligence to the la- ^f ^/^g ^^. 
bourer has been, and is still, most inadequately appreciated, tourers. 
Almost every industrial operation will be better and more 
expeditiously effected by the intelligent workman. Even 
a simple process like ploughing will soon be effected by 
costly and complicated steam machinery, which cannot, 
without serious risk, be entrusted to the care of ignorant 
workmen. Education produces a most decided improve- 
ment in the moral character of the workman. If work- 
men are dishonest, the loss which is incurred is in no way 
represented by the amount of property which may be 
stolen ; if reliance cannot be placed upon labourers, they 
must be superintended and watched, and thus their la- 
bour is rendered less productive, because a certain portion 
of the wealth which is produced has to be paid to over- 
lookers and others who would not be required to watch the 
labourer if complete confidence could be reposed in him. 
The productiveness of labour depends upon a great variety 
of other personal qualities possessed by the labourer. In- 
temperance makes a labourer less able to do his work, and 
his labour is sure to be more irrea^ular. ^^ V^^' 

nrn 1 • /••IT • ductiveness 

The productiveness 01 capital may be estimated by the of capital. 



58 



Manual of Political Economy. 



BOOK I. 
CH. V. 



It is af- 
fected by 
improve- 
ment of 
industrial 
processes; 



amount of wealth whicli is produced by the application of 
a certain quantity of capital. Capital is of course capable 
of producing more wealth when it employs efficient la- 
bour and is applied to fertile land ; but there are certain 
circumstances which tend to make capital more pro- 
ductive, whether the land and labour are good or bad. 
Every improvement in any of the processes of industry 
makes capital more productive. Without the assistance of 
the steam-engine, the capital at the present time existing 
in the country would not suffice for the production of even 
a small portion of wealth which is now annually produced. 
Machinery causes a greater quantity of wealth to be created 
with the assistance of a smaller amount of labour and 
capital. But the productiveness of capital is popularly 
estimated according to a different standard ; for capital is 
conceived to be productive when the profits obtained by 
the capitalist are large. For instance, a farmer might say, 
It is true that in consequence of the advance in agricultural 
science a great deal more produce is grown upon a farm 
now than a few years since ; but the rents which the far- 
mers pay have increased ; and, therefore, the profits of the 
farmer are not larger now than formerly. His capital, 
therefore, gives him no greater return, and he might for 
these reasons consider that the productiveness of capital 
had not been increased. This, no doubt, might be the 
case, as far as the farmer himself was concerned ; but the 
productiveness of capital depends upon the amount of 
wealth produced, and not upon the particular manner in 
which this wealth may be distributed amongst the different 
parties who have a claim to be remunerated. The laws 
which determine the relative value of the remuneration 
received by landlords, capitalists, and labourers, will be 
explained in those chapters which treat of the distribution 
of wealth. 
ly every- Everything which tends to economise labour makes 
thing which capital also more productive. Suppose the labourers on a 



Variations in Productive Poiver. 59 

farm have to be overlooked ; a farmer who has twenty 
labourers might consequently be compelled to have a bailiff, 
in order to see that the labourers do not shirk their work, tends to 
The bailiff will be better paid than the ordinary labourer. ^Xwr'^^ 
The bailiff, we will suppose, is paid a pound per week, the 
ordinary labourer nine shillings. The bailiff thus receives 
ten per cent, of the whole wages paid by the farmer. If the 
labourers should be so much improved by education or by 
any other means that they would work equally well without 
being overlooked, the services of the bailiff might be dis- 
pensed with, and his wages would be saved to the farmer, 
who would now pay one-tenth less in wages than before. 
The capital of the farmer might therefore be diminished, 
and thus capital would be rendered more productive, be- 
cause the same quantity of produce would now be raised 
with the outlay of a smaller capital. The case here sup- 
posed may perhaps be some day practically realised ; as the 
labourer becomes improved by education, he will no doubt 
require less watching. Hitherto, the great social and 
economic importance of securing the greatest efficiency of 
labour, by giving the labourer some pecuniary interest in 
the work in which he is employed, has been most imper- 
fectly understood. The relations between employers and 
employed will never become satisfactory until they are more 
united by the bonds of mutual interest. Too many of our 
labourers pass a life of hopeless drudgery ; they in no way 
share their master's prosperity. In some of the succeeding 
chapters of this work, the great advantages of co-partnership 
and cooperation will be shown ; for it will be explained 
that under such systems not only has the labourer been 
socially and morally improved, but capital and labour have 
in this way been rendered more productive, by calling forth 
the highest and most skilled efforts of the labourer. Im- 
proved relations between employers and employed might 
render unnecessary the present large outlay upon wages of 
superintendence. 



6o 



Manual of Political Economy. 



labour in- 
creases its 
ejiciency, 



BOOK I. We have as yet in this chapter alluded only to the 
- ^^'^^^ - general causes on which the productiveness of land, labour, 
and capital depend. We will now consider some of the 
more special means by which the efficiency of the three 
Divmon of agents of production may be increased. As a first ex- 
ample we will refer to the striking illustrations employed 
by Adam Smith, which have made us all familiar with the 
advantages derived from the division of labour. A pin 
passes through about eighteen processes. The metal has 
to be drawn into wire, the wire has to be cut a proper 
length, the end sharpened, the head must be made and 
fastened to the pin, the pin must be burnished and then 
properly packed. The most skilled workman could not 
make more than twenty pins per day if he had himself 
to attend to all the processes through which the pin passes. 
But when the labour of pin-making is divided, the various 
processes being performed by different workmen, ten work- 
men will make 50,000 pins in a day. Without division of 
labour the ten workmen would only make 200 pins per day, 
and thus it would appear that in this case a proper di- 
vision of labour increases its productiveness more than two 
hundred fold. Other examples, even more striking than 
the one just quoted, might be readily selected. M. Say 
says that, in the manufacture of playing cards, there are 
seventy-two distinct operations. When these operations 
are appropriated to different workmen, 15,500 cards 
have been made in a day by thirty workmen ; but if a 
single workman had to perform all the operations himself, 
he would not make more than one or two cards per day. 
The increased efficiency which is thus conferred upon 
labour is, according to Adam Smith, due to three causes : 

1. The increase of dexterity in every particular work- 
man. 

2. The saving of the time which is commonly lost in 
passing from one species of work to another. 

3. The invention of a great number of machines which 



for three 
reasons. 



Variations in Productive Power, 6i 

facilitate and abridge labour, and enable one man to do book i. 
the work of many. ^^' ^' 



The greatest influence no doubt is produced by the first The dex- 
of these causes, namely, the increase of dexterity of the ^qJ,^^^ J^ 
workman. The effect of continuous practice in performing increased. 
both mental and physical operations is most strikingly 
exhibited in the increased quickness obtained. By prac- 
tice the eye and hand may learn to work in perfect unison, 
and the hand and eye obey with intuitive quickness the 
behests of the human will. The glass-blower appears to 
give a casual glance at a decanter, wishing to make one 
like it. He places some molten glass upon his blow-pipe, 
and after a few minutes of blowing and twisting a decanter 
is made, and between it and its model the nicest eye can 
detect no difference in size or shape; yet science can 
scarcely analyse or explain the marvels of this extraordi- 
nary handiwork. No rule but the eye has been employed 
to measure, the eye looks at the decanter, and the hand is 
thus directed. The shape of the decanter is produced hj 
a combination of different forces, which the most refined 
analysis of the mathematician could scarcely investigate; 
there is the force of expansion caused by the blowing, and 
centrifugal and other forces are brought into action by the 
twirling and twisting. Many of the operations of industry 
need a dexterity which can only be acquired in childhood ; 
the pliant fingers of youth must, as it were, be moulded to 
the work. When, therefore, the distinct operations of any 
industry are performed by different workmen, then each of 
these operations may become, as it were, a separate trade, 
for which men may be separately trained. If all the pro- 
cesses of pin-making were performed by one man, he would 
not have sufficient practice to acquire the requisite dexte- 
rity in any single operation, and therefore, if there was no 
division of labour in pin-making, all the labour employed 
must be, comparatively speaking, unskilled, and conse- 
quently very inefficient. The precision and quickness 



62 Manual of Political Economy. 

acquired by practice are not in any way confined to the 
mechanical operations of trade. What can be more extra- 
ordinary than the precision and quickness of the accom- 
plished and practised musician ? If the theory of violin- 
playing is explained, it seems to require a skill beyond the 
reach of man. The fingers appear to move with careless 
rapidity over the strings, yet the accuracy of each note 
depends upon the string being touched with the strictest 
correctness at some particular point. 

Another advantage results from the dexterity of the 
superior workman, for he will use all the materials em- 
ployed with the greatest possible economy; nothing is 
wasted by his blunders or mistakes. 
The time Later writers on political economy, and amongst them 
from one i^ particular, Mr. Mill, consider that too much importance 
operatim }^^^ been attributed to the second of the three causes 
is saved; which, according to Adam Smith, explain the increased 
efficiency of labour when the distinct operations of indus- 
try are properly apportioned amongst the workmen em- 
ployed. A great deal of time is undoubtedly wasted if a 
workman has often to pass from one species of work to 
another, and this waste is of course obviated when a 
labourer can steadily keep throughout the day at the same 
although kind of work. But Adam Smith exaggerates the nature 
the advan-^ ^j^^ jj^q amount of the advantao^es which may be thus 

tage of this . . i i • t 

has been secured, and omits to notice some counterbalancing dis- 
exagge- advantages which may very possible occur. Adam Smith 
says, A man commonly saunters a little m tarning his 
hand from one employment to another. "When he first 
begins the new work he is seldom very keen and hearty; 
his mind, as they say, does not go to it, and for some time 
he rather trifles than applies to good purpose. The habit 
of sauntering and of indolent careless application which is 
naturally or rather necessarily acquired by every country 
workman, who is obliged to change his work and his tools 
every half-hour, and to apply his hand in twenty different 



Variations in Productive Power. 63 

ways almost every day of his life^ renders him almost booki. 
always slothful and lazy, and incapable of any vigorous - - ' ' - 
application even on the most pressing occasions.' There 
is nothing in this passage which is absolutely incorrect ; it 
is, however, truth overstated. Each of the circumstances 
mentioned by Adam Smith produces some of the inflaence 
he describes; but his remarks would seem to prove that 
all whose employments are various must be slothful and 
indolent labourers, but the reverse is often the case; 
labourers frequently become quicker and more intelligent 
when the monotony of their employment is relieved by 
some variety. Waiters in large establishments are pro- 
verbially quick in their movements, and yet before they 
finish one thing they are often called upon to do a dozen 
different things. Gardeners are generally extremely in- 
telligent, and yet there is the most constant variation in 
their employments. Before machinery was so largely used 
in agriculture as it is at the present time, the work of the 
agricultural labourer was far more monotonous. There 
are many labourers still living, who during twenty years 
of their life spent ten hours a day during ten months of 
the year in thrashing with the flail. Such a labourer might 
perhaps be somewhat stronger as a thrasher, but he passed 
his life as a machine, and it was impossible that an active 
intelligence should be preserved through such an ordeal. 

The third advantage which arises from the division oiTheim-en' 
labour as enumerated by Adam Smith is, 'the invention J^^^ ]J'^' 
of a great number of machines which facilitate and abridge perhaps 
labour, and enable one man to do the work of many.'*'^^**'* ^ ' 
There is some ambiguity in Adam Smith's conception of 
the causes which influence the invention of such machines. 
E-eturning to our original example, each of the workmen 
employed in pin-making has his attention concentrated 
upon some distinct operation of the manufacture, and it is 
therefore maintained that he will be more likely to suggest 
some improvement in the particular operation in which he 



64 Manual of Political Economy. 

BOOK I. is constantly engaged, tlian would another workman whose 
^^' ^' attention should be distracted upon a great number of the 



processes of pin-making. The supposition may be verified 
by some striking instances. The boy whose only employ- 
ment consisted in opening and shutting the valve of a 
steam-engine invented a self-acting apparatus, which had 
not suggested itself to "Watt and other accomplished me- 
chanicians. The spinning-jenny and the mule were invented 

lut ilm is by working men ; but there is no general principle which 

douhtfidas rep^^iiates the invention of machines of industrial usefulness ; 

'principle, many most importa-nt mechanical improvements have been 
suggested by those who perhaps for the first time may have 
watched the operations of a particular industry. Novelty 
has often been the prompter of an invention, and improve- 
ments in machinery have often, as it were, been forced 
upon a trade. The practical advantage of the steam 
thrashing machine was proved long before the farmers 
could be generally induced to use it. Routine has often 
so dulled the minds of those who are employed in some 
special industrial operation, that they are reluctant to 
understand that any improvement in the processes of a 
particular industry is required. 

The inven- Although division of labour may not be so entirely the 

tion of ma- ^ i • i • , • • , • i 

chinesjwio- cause 01 mechanical inventions as is sometimes supposed, 
ever, facili- jqI there can be no doubt that a mechanical invention 

tcttes the 

division of almost always induces a greater division of labour. When 
labour. ^ machine is at work there are various operations per- 
formed by it which must be separately attended to. The 
machinery employed in a cotton-mill regulates the extent 
to which the division of labour is carried : for every pro- 
cess through which the cotton passes, from the time it is 
cleaned until it is woven into cloth, must be separately 
attended to, and thus, as it were, division of labour is 
enforced by the application of machinery. The introduc- 
tion of new machinery may necessitate a much greater 
division of labour. Boat-building has not hitherto required 



Variations in Productive Poiver, 65 

any great division of labour. A most ingenious machine, ^oo^ i- 

however, has been lately invented by an American, Mr. > ^— ^ 

Nathan Thompson, by which a boat may be completely 
built in a few hours. If boats are thus built, the nature 
of the machine will exactly determine to what extent divi- 
sion of labour will be henceforth practised in boat-building, 
for the distinct operations performed by the machine must 
be attended to by a certain number of workmen. 

Mr. Babbage has pointed out a most important advantage Another 
resulting from the division of labour which was altogether ^o/dllisfon 
omitted by Adam Smith. Our former example will most of labour 
clearly illustrate this advantage. The labourers who are f ^^^^ ^*' 
employed in the various operations in pin-making receive Balhage,^ 
wages which vary greatly. Boys can fasten on the heads y^c'^^^^^o^^o/ 
of the pins with as much facility as men; girls can sort labourers. 
and pack the pins with great rapidity. Some of the other 
operations of pin-making, such as drawing the wire and 
pointing the ends, are performed by highly trained and 
very skilled labourers, and consequently the remuneration 
received varies from fourpence-halfpenny to four shillings 
per day ; and in other branches of industry there are even 
greater differences than these. Mr. Babbage states that 
the various parts of which a watch is composed employ a 
hundred distinct trades, and the skill required in some of 
these trades is much greater than in others. A watch-case 
is, comparatively speaking, a simple article to make, whilst 
on the other hand some of the parts on which the accuracy 
of a chronometer depends must be so delicately adjusted 
that only very few workmen ever acquire the refined skill 
which is needed. These workmen therefore possess a vir- 
tual monopoly, and can obtain wages far exceeding any 
which are usually paid. If there was no division of labour 
in pin-making, each workman who made the pins must 
possess the skill which is required for each of the opera- 
tions. He must be able to sharpen the pins, and the 
labour of a man who can sharpen pins is, as we have seen. 



66 



Manual of Political Economy. 



BOOK I. 
CH. V. 

Economic 
advantage 
thus ob- 
tained. 



The divi- 
sion of la- 
bour is 
limited by 
the demand 
for the com- 
modities 
produced. 



wortli four shillings per day. Without division of labour 
the workman cannot spend his whole time in sharpening 
the ends of pins; he will have to devote a portion of his 
time to fastening on the heads of pins, and is then doing 
work which is worth only fourpence per day, thus incur- 
ring the most serious waste. A workman would be thus 
compelled to produce what was worth only fourpence per 
day when his labour might produce what was worth six 
shillings per day. Mr. Babbage has attempted to form 
some estimate of the loss which would be thus incurred, 
for he has calculated 'that even supposing a workman 
could make a pound of pins in the same time in which ten 
workmen combining their labour can make ten pounds, 
they would cost in making three times and three-quarters 
as much as they now do by means of the division of labour.' 
A still greater loss would be incurred if the mechanician 
upon whose skill the accuracy of a chronometer depends 
had to waste his time, and perhaps destroy the delicacy of 
his touch, upon some of the rougher work by which parts 
of the watch may be made. Labour is most efficient in the 
production of wealth when each individual can be employed 
upon work which is best suited to the skill and physical 
strength which he may possess. The perfection of modern 
manufacturing industry makes such a minute division of 
labour possible, that the labour which is performed can be 
so apportioned as to suit the capacity of each individual 
workman. 

It has been often remarked that the demand for any parti- 
cular commodity places a practical limit upon the extent to 
which division of labour in its manufacture can be carried. 
There are in this country few commodities in such a posi- 
tion. But to take a hypothetical case ; let it be supposed 
that a pin manufactory is established in a new colony, 
whose population is small. If there is such a division of 
labour that ten men are employed in the manufactory, 
there would be made, as has been before stated, fifty 



Variations in Productive Power. 

thousand pins in the course of a year. The colony might 
only have a demand for half of this number ; and hence, if 
we suppose, for the sake of simplicity, that the colony has 
no export trade, there will be more pins made than are 
required. The pin manufactory might be closed during a 
portion of the year, in order that a smaller number of pins 
might be made. But in order to avoid the loss which is 
always incurred when a trade is carried on at intervals, the 
pin manufacturer would probably find it more to his ad- 
vantage to employ a smaller number of men. If only 
five were now employed, there would not be so great a 
division of labour, and the labour of the five workmen 
would not be so efficient, for the number of pins now made 
in the course of the year would fall far short of one-half 
of the number previously made, although only double the 
quantity of labour was then employed. In England there 
are few things which are manufactured at an increased cost 
in consequence of the limited demand existing for them. If 
the stereoscope were only used as formerly for scientific 
purposes, and employed, for example, like many other 
optical instruments, by professors to illustrate the laws of 
optics, a stereoscope would be far more expensive than it is 
now. The few which would then be purchased in the 
course of a year would be made, speaking compara- 
tively, without any division of labour; it would not be 
worth while specially to apply any machinery to the con- 
struction of stereoscopes. But the stereoscopes have now 
become a drawing-room toy, and tens of thousands are 
probably made every year. The price of stereoscopes has 
consequently been greatly reduced; so many are now 
manufactured, that workmen may be employed entirely in 
constructing them; and each part in a stereoscope may, 
like the various parts of a pin, be separately manufactured. 
All the advantages of division of labour can in this manner 
be secured; the dexterity of the workman is increased; 
machines, too, will be probably invented to specially 

f2 




68 Manual of Political Economy, 

facilitate some of the operations in the construction of 
the stereoscope, and these various operations can now be 
apportioned amongst workmen according to their skill and 
capacity. The practical result of this is strikingly exem- 
plified in the fact that a stereoscope which now can be 
purchased for three shillings could not, a few years since, 
be obtained for less than a pound. 
Coinhina- The efficiency of labour as an agent of production depends 
tionofla- Yi upon the combination or cooperation of labour 

oour zs as ^ i v- j • + 

necessary as upon its division. Labour may be com.bmecl m two 
o/Sr' different ways, and these have been described by Mr. 
Wakefield as simple and complex cooperation. A com- 
bination of several workmen to do the same thing is termed 
by Mr. Wakefield simple cooperation; and its importance 
can be readily illustrated. Work has often to be done 
which requires the strength of a great number of men; a 
weight may have to be lifted which could not be Hfted by 
any one man. Without such a cooperation of labour none 
of the works which mark the civilisation of a country could 
have been accomplished; for unless labourers united their 
strength and skill, bridges could not be built, railways could 
not be made, mines could not be dug, and buildings could 
not be erected. The assistance which labourers engaged 
in one employment lend to those in another was described 
by Mr. Wakefield as the complex cooperation of labour. 
He was the first who adequately explained the most impor- 
tant considerations which arise from such a combination of 
labour. Political economists, guided by the example of 
Adam Smith, had previously almost entirely confined their 
attention to a very siibsidiary branch of the subject, namely, 
the division of labour. We have already indirectly re- 
marked upon the great extent to which different employ- 
Case of the ments combine to assist each other. The manufacture of 
manufac- ^.q^^-qj^ ^loth was mentioned as an example, to show how 

tuve of . . 

cottondoth. various are the different classes of labourers who assist in 
the production of even a simple commodity. We were led 



Variations in Productive Power, 6g 

into endless ramifications in attempting to trace the dif- 
ferent kinds of labour, either directly or indirectly brought 
into requisition, from the time that the cotton seed is planted 
in the swamps of Georgia until the cloth is woven in the 
looms of Manchester. There are distinct sets of labourers 
employed in tilling the cotton fields, in carrying the cotton 
to the port, in navigating the vessel in which it is shipped, 
in unloading the cotton at Liverpool, and then in trans- 
porting it to the mills of Manchester. All these different 
classes of labourers have been directly engaged in bringing 
the cotton to the place where it is wanted by the manufac- 
turer. It would be vain to attempt a complete enume- 
ration of all the different labourers who have indirectly 
assisted in bringing the cotton to market. There are the 
shipwTights who have built the ships, the labourers who 
have constructed the roads along which the cotton is car- 
ried, and the artizans who have made the tools with which 
the cotton fields are cultivated. 

There is, as it were, a tacit compact between each indi- bearing of 
vidual and society in general, that the commodities which cipie^f' 
he consumes will be produced for him by other classes of combina- 
labourers. If there was not confidence that such a com- ^Q^r upon 
pact would be realised, society would return to its primitive cdonisa- 
tjrpe; for each man would have to live on his own plot of 
land, and every commodity which he consumed would have 
to be produced by himself. If this is done in any country 
to a large extent, the country must be poor and backward. 
Mr. Wakefield pointed out the important bearing of such 
considerations upon colonisation. The English Government 
had frequently encouraged a system of colonisation which 
tended to impoverish a colony, by impeding this complex 
cooperation of labour. In order to stimulate emigration, 
each family obtained from the government a certain area 
of land in fee-simple, and thus a new colony was dotted 
over with the isolated settlements of a great number of 
distinct families, who lived so widely scattered that they 



70 Manual of Political Economy. 

could hold but slight intercourse with each other. Each 
family had, therefore, to produce for itself almost ever3rthing 
it required. Under these circumstances there could be little 
commerce or trade, and the country necessarily remained 
in almost a stationary condition. The people in one sense 
were not poor ; for the virgin fertility of the soil supplied 
them abundantly with the ordinary necessaries of life; 
but there was an almost complete absence of cooperation of 
labour. One of these families might possess a superfluity 
of food: there might be some commodity which, in a par- 
ticular situation, could be easily produced, yet it could not 
be exchanged for some other commodity which a family 
might particularly want, and which it might, perhaps, fail 
to obtain, even by the application of the greatest amount 
of labour. A colony in this condition derives scarcely any 
benefit from such great natural advantages as a genial 
climate, great mineral resources, and vast tracts of fertile 
land, as yet untilled and unappropriated. / Therefore, Mr, 
Wakefield emphatically insists that a government, when 
establishing a new colony, ought not to grant to emigrants 
settlements of land, far distant, and widely scattered, 
without at the same time taking steps to encourage the 
growth of a town population. The settlements which are 
granted by the government ought to be concentrated as 
much as possible, and should, in the first place, be not 
remote from the towns. There will then at once arise a 
cooperation between the industry of the town and the 
industry of the country. The industry of the town will 
supply the inhabitants of the country with the commodities 
which they found most difficult to obtain, and the town 
population will have an active demand for the food and 
other natural products which in the country can be raised 
in such plentiful abundance. The efficiency of labour will 
thus be greatly increased; for, with such an interchange of 
commodities, a family which could previously do little more 
than supply itself with food from a tract of land, can now 



Variations in Productive Power. 71 



I. 

CH. V. 



not only obtain, with the same labour, all the food it re- ^^^^^ 
quires, but can also purchase from the town population 
articles of utility and luxury before unattainable. Such a 
colony will rapidly advance in wealth ; roads will be made, 
and other industrial appliances will be carried out which 
will powerfully stimulate the rising commerce. 

It was at first supposed that the ffold discoveries in ^^^f P''^^- 
Australia would cripple its agriculture; labour would be ^^^^^g^^ ^-^ 
dra'svn from the farm to the gold mine ; the wages of agri- -Australia. 
cultural labourers would greatly increase ; and under such 
difficulties agriculture must decline. But although this 
did in the first instance take place, yet agriculture speedily 
recovered in Australia, and has within the last few years 
rapidly advanced. The reason is that the gold discoveries 
caused the town population to be largely and suddenly 
increased, and the food which such a town population 
required was supplied from the agricultural districts. 
Those who sold the food could purchase, in return, all the 
products which the commerce of Europe provides; and 
Victoria has, in a few years, advanced from an aggregation 
of isolated settlements to the position of a prosperous 
country, with all the appliances of the oldest and most 
thriving commercial community. The large yield of gold 
within the last ten years is generally considered to be the 
source of the increased wealth of Australia. The gold may 
have been the primary stimulus of her prosperity ; but the 
gold which has been produced would most inadequately 
represent the extent to which her wealth has been aug- 
mented. Not only has all her labour, whether agricul- 
tural or not, been rendered more efficient by the increased 
cooperation of labour which is now practised there, in 
consequence of the growth of the town population, but 
even her land has been rendered far more productive of 
wealth, because, at an earlier period, much of the produce 
which was obtained from it was not required, and, there- 
fore, could not be accounted as wealth. 



72 Mamial of Political Economy. 

There cannot be any extensive cooperation of labour 
between one employment and another, or between one 
ComUna- district and another, unless the means of communication 
bZrre-^' ^^^^ S^^^- Nothing, probably, has more contributed to 
quires good ipeiyetimte the poverty and backwardness of India than 
Tommunl- *^^^ ^^^^ of good roads. There, one district can scarcely 
cation. lend any assistance to another ; an interchange of commo- 
dities, which would be advantageous to every party, is often 
prevented by the want of a road. During the terrible 
famine which ravaged the North- West Provinces, in the 
year 1860, wheat, which was in one district at the famine 
price of four rupees per maund of 88 lbs., was selling 
in adjoining districts at less than two rupees per maund. 
As long as such occurrences can take place, India must 
continue poor, her resources must remain imperfectly 
developed, and her labour must be comparatively ineffi- 
cient. A village community virtually isolated from the 
rest of India cannot now raise that produce for which 
their land is best adapted, but must cultivate it with 
a view of supplying themselves with the first necessaries of 
life. Manchester would, no doubt, annually purchase of 
India many million pounds' worth of cotton; but cotton 
will not be produced on any large scale until the people of 
India feel that if they grow cotton they will be able to 
exchange it for food. This confidence they cannot have 
while the roads of India are in such a state that food, which 
is in abundance in one district, cannot be transported a 
few miles to alleviate the sufferings of a starving population. 
Thevarious The remarks which have been made to illustrate the 
'oflapUal f^^ctions of capital, afford striking examples of the complex 
i.'lustrate Cooperation of labour. An individual may save the fund 
principle which forms his capital from a great variety of incomes. 
The wealth which he has thus saved, he will probably em- 
bark in a great number of different investments, and in this 
way assist the labour of those engaged in the production 
of various kinds of wealth. Part of his capital will pro- 



Variations in Productive Poiver. 73 

bably be devoted to the trade in which he is engaged, and book i. 
he will perhaps deposit the remainder with his banker, by . ^^^ ^' . 
whom it would be lent to numerous traders to support 
them in their business. All commerce, in fact, forcibly 
exemplifies the cooperation of labour, not only between 
different employments, but between different countries. 
England gathers wealth from every quarter of the world, 
but at the same time she equally enriches the countries 
which whom she trades. It is England's demand that has 
stimulated the industry of so many countries. 

In an earlier part of this chapter, we considered the Arrange- 
increased efficiency given to labour, when the distinct '^^^.^^i ^ 
operations of any industry are performed by separate sets 
of workmen. In this case, workmen who are differently 
employed combine to assist each other in the production 
of the same commodity, and hence division of labour is an 
instance of the complex cooperation of labour. We have 
therefore departed from scientific accuracy in our arrange- 
ment of this chapter, and, partly in deference to popular 
opinion, have given precedence in our remarks to a dis- 
cussion of the advantages of division of labour. Political 
economists following in the steps of Adam Smith have 
restricted the subject to the division of labour in its narrow 
sense. The reason of this may perhaps be, that the illus- 
trations used by Adam Smith have made the division of 
labour one of the most popular parts of political economy; 
and thus its importance, compared with other portions of 
the subject, has been greatly exaggerated. 



74 



CHAPTER VI. 

PEODUCTION ON A LARGE AND SMALL SCALE. 



BOOK I. TF we had not feared that the last chapter was becoming 
' — ^^ — '-^ _L too long, we should not have placed the subject we here 
propose to discuss in a separate chapter, because the carry- 
ing out of production on a large and small scale exerts a 
very powerful effect upon the productive powers both of 
land, labour, and capital. 
Com.'para- The comparative advantages of production on a large, 
^tacmoT^' ^^^ production on a small scale, depend upon conditions 
production which may vary greatly at different times, and in different 
^and small employments. Every extension of machinery no doubt 
scale. tends to give an advantage to production on a large scale. 

In the days of hand-loom weavers, little would have been 
gained by gathering them together into large buildings, 
such as the mills of Manchester. Each hand-loom weaver 
worked for himself ; he needed not the assistance of others, 
and therefore there was no reason why he should not work 
in his own cottage. But the introduction of machinery 
has divided the work which was previously done by the 
hand-loom weaver, into a great number of distinct opera- 
tions ; and in this way machinery renders production on 
a large scale absolutely necessary. But to what extent it 
is advantageous to increase the scale of production, whether 
it is more profitable to erect a mill containing 10,000 
spindles, or two mills containing 5,000 each, will be most 
correctly determined by those engaged in the trade. The 
comparative economy of working large and small mills is 



Production on a Large and Small Scale, 75 

sure to be quickly ascertained by the manufacturers them- book i. 

selves; there can, however, be no doubt that a small ^ \ — !• 

manufactory will have little chance of competing with a Advan- 
large one, if the small manufactory is not large enough ^^^^^ ^'•^ 
for the efficient working of the most complete machinery manufae- 
used in the trade. Again, a small manufactory cannot 
compete with a large one, if in the one there is a less 
complete division of labour than in the other. A pin 
manufactory which employed ten men would produce pins 
at a much smaller cost than a manufactory in which only 
five men were employed. The labour of superintendence 
generally forms a comparatively larger item in small 
concerns than in large ones; for instance, each room in a 
cotton mill may require an overlooker, whether a hundred 
men are working in the room, or two hundred. A steam- 
engine must be constantly watched by an engineer^ 
whether the engine is fifty-horse power, or a hundred- 
horse power; but all such questions concerning the 
greater or less economy of business arrangements will 
ultimately be decided by practical experience. There is 
at the present time a very decided tendency to increase the 
scale of production, and this tendency is particularly shown 
in those vast manufactories and warehouses which exem- 
plify the wealth and energy of Lancashire and Yorkshire; 
and hence we must conclude, that production on a large 
scale, especially in the manufacturing districts, is rapidly 
becoming more advantageous. In fact, we have ascertained 
that a cotton mill containing 10,000 throstle spindles can 
be worked with a capital of 20,000?., whereas a mill with 
5,000 spindles requires a capital of not less than 11,000?. 

It was remarked in the last chapter that the extent of ^^^ scale of 
the demand places a limit upon the division of labour. '^uHng^o'pe- 
But the extent of the demand influences in a much more nations is 
decided manner the scale in which the production of any ^^^*^g. ^ 
commodity can be carried on. A very serious loss would 'f^o.nd. 
be incurred if the demand for any commodity was not 



7 6 Manual of Political .Ecoriomy. 



BOOK I. 
CH. VI. 



sufficient to take off all that might be produced by the 
- machinery and plant which may have been erected for its 
manufacture. Machinery when unemployed is capital 
lying idle, and the workmen when thrown out of employ- 
ment could only be kept together by paying them some 
portion of their wages. This again would be capital 
wasted, and if the labourers were not thus kept together, 
when work was resumed new and untrained hands would 
have to be employed. Machinery also, if kept idle, fre- 
quently suffers great injury. The fluctuation in the 
demand, when it is small, is comparatively much greater 
than when the demand is large. 
Production Even if production on a large scale is very advan^ 

on a small i ,• n i , -n i 

scale map tageous, production on a small scale may still be very 

mamtain jjLuch practised. Let us again use our previous example, 

though at a Sind suppose that a cotton mill containing 20,000 spindles 

disadvan- ^^^^ -j^q worked at a much cheaper rate than one containing 

5,000 ; but a capital of 40,000Z. may perhaps be required 

to work a mill with 20,000 spindles, whereas a capital not 

much exceeding 11,000^. would probably suffice for a mill 

with 5,000 spindles. The number of individuals who 

possess a capital of 40,000Z., and who are willing to invest 

it in a cotton mill, is very limited, and therefore there can 

only be a limited number of mills with 20,000 spindles. 

These mills may not suffice to spin all the cotton for which 

there is a demand, and therefore other and smaller mills 

must be worked. It is true that the small mills could not 

remain open if they had to compete with an unlimited 

number of large mills; but as the number of these is 

virtually restricted, the small mills may be still worked at 

an advantage, although the profits obtained by these 

mills may fall far short of the profits obtained by the larger 

ones. Large capitals thus obtain an advantage, and 

possess as it were a monoply ; we shall treat this subject 

The advan- ^^ considerable length in our chapters on profits. 

tages of It would perhaps be very naturally supposed that, in a 



Production on a Large and Srnall Scale, 77 

wealthy country like England, production on a large scale 
when advantageous will never be restricted by the causes 
to which we have just alluded, for it may be said that if production 
the individuals who have sufficieat capital to work large ^ ? ^^^f^ 

•n T • 1 • 1 -n 1 T scale only 

mills are limited m number, there will be no difficulty in partly at- 
gathering together the requisite capital by means of joint- ^f^f^'^^^^^v 
stock companies, and that such companies will avail them- companies, 
selves of the advantages of a large production, and thus 
drive the small producers out of the market. But joint- 
stock companies labour under many difficulties; and al- 
though they secure the advantages of producing on a large 
scale, yet in many industrial occupations, joint-stock com- 
panies cannot compete with the energy of the individual 
trader or manufacturer. Such works as railways, docks, 
and canals require, both for their construction and main- 
tenance, a capital far greater than that possessed by any 
individual, and therefore such undertakings must be car- 
ried out by joint-stock companies. But if a joint-stock 
company conducts some ordinary business, there is want- 
ing that energy and watchfulness which an individual 
exercises when a business is his own. If competition is 
active, a business cannot be successful unless all its opera- 
tions are conducted with energy, and unless economy is 
secured by constant vigilance. In a joint-stock company 
all depends upon the manager or agent. The indiiYidwdl owing to the 
shareholders are not sufficiently interested to take any part '^^J^l^ ^^ *^' 
in the management of the concern. Men can very rarely sharehoU^ 
be found who are as careful with other people's property ^^l^^^ er 
as they would be with their own. The manager of a com- 
pany may do nothing which is in the slightest degree 
dishonest, it may be impossible to single out any par- 
ticular instance in which he has neglected to do his duty, 
yet the position in which he is placed wdll not probably 
call forth those qualities which not only distinguish the 
good man of business, but which also cause the success 
of commercial undertakings. If the manager is partly 



78 Manual of Political Economy. 



BOOK I. remunerated by a share of the profits realised, he will no 
• — !^ — '-^ doubt be stimulated to much greater exertion. Joint- 
stock trading companies have frequently failed, because 
those concerned in their management have not a suffi- 
ciently strong pecuniary interest in their success. There 
can be no doubt but that individual employers suffer most 
serious losses from the listlessness and apathy of their 
workmen, although such employers have the strongest 
motives to prevent neglect of work by their labourers ; the 
losses however which are thus incurred will be still more 
serious in the case of a trading company, when the la- 
bourers are only watched by a manager, who is compara- 
tively uninterested. A joint-stock trading company would 
even be more benefited than the individual trader, by 
adopting some course, if it were practicable, which would 
give the labourers a pecuniary interest upon the work in 
which they were employed, for in this manner the energy 
and skill of the workmen might with greater certainty be 
secured. Joint-stock companies have always experienced 
the greatest obstacles in retail trades, where the transac- 
tions are numerous and small. The petty details of such 
business seem particularly to require the energy of 
individual management. 
Special ad- The cooperative societies however, which have lately 
vantage of ^^^^jj^q^ gQ much prominence in the north of England, 
societies, are joint-stock companies; the capital is supplied almost 
entirely by the labouring classes, and therefore the 
number of shareholders is extremely large. Yet these 
societies have not only established cotton mills, but have 
engaged with the most remarkable success in the or- 
dinary retail trades, conducted by grocers, drapers, bakers, 
butchers, &c. The success of these societies not only 
proves that the disadvantages of the joint-stock sys- 
tem have been much exaggerated, but also indicates how 
the most prominent of these disadvantages may be over- 
come. The prosperity of the cooperative stores is 



Production on a Large and Small Scale. 79 

probably mainly due to the ready-money system which 
they almost invariably adopt ; the smallest sum is conse- 
quently rarely lost in bad debts. But the cooperative 
manufactories only differ in one important respect from 
ordinary joint-stock undertakings; the labourers in these 
mills share a certain proportion of the profits realised. 
This provides an effectual antidote to the disadvantages of 
the joint-stock system, and fully accounts for the success 
which these cooperative mills have achieved. 

It is in every respect advantageous to a country, that The exten- 
the joint-stock system should be encouraged ; it greatly foinlstoch 
promotes the production of wealth. Small capitals which, systera de- 
if separately applied, would do little towards the pro-^^'" ^' 
duction of wealth are brought together by joint-stock 
companies, and accomplish industrial works of the utmost 
importance. A thousand individuals who have saved 100^. 
each, may not have the time, capacity, or inclination 
themselves to employ the money in any business. If each 
of these individuals subscribed his 100?. to one common 
fund, a capital would be created sufficient to work a large 
Manchester manufactory; they would become proprietors 
and promoters of a great commercial concern, annually 
producing a large amount of wealth, and annually employ- 
ing many hundreds of labourers. 

The relative advantages of large and small farming have Large and 
lonof been one of the most controverted points connected ^J^^^^f^''™'- 
with the subject of this chapter. In England, agriculture 
has no doubt, within the last few years, been conducted on 
a much larger scale than formerly. In the best culti- 
vated districts of England, each farmer generally rents not 
less than three or four hundred acres. In many parishes 
the land which is now cultivated by one or two farmers 
was, within the memory of those' who are still living, par- 
celled into twenty or thirty distinct holdings. In France, 
small farming is promoted by compulsory subdivision 
of land. Although the inferiority of French agriculture 



8o Manual of Political Economy, 

has perhaps been somewhat exaggerated, yet there can be 

no doubt that it is extremely bad. Hence the English 

Advantages have become much prejudiced against small farming. We 

o/ large ^-^ |^Pg^ point out some of the obvious advantag-es which 

arise from large larmmg. ihe extended use of agricultural 

machinery has been a prominent feature of that great 

improvement in the cultivation of the soil which has taken 

place within the last few years. Twenty years since the 

greater portion of the corn grown in this country was 

thrashed by the flail; now steam-thrashing machines are 

used in every district, and the flail has been almost 

banished; even agricultural labourers rejoice in the 

change, and confess that they should most reluctantly 

resume the use of the flail ; the young men of the present 

day would probably not submit to such monotonous work. 

The steam-cultivator seems on the point of being made 

practically useful, and it is now almost certain that such a 

method of cultivation will be generally adopted at some 

future time, not far distant. 

Agrkul- A much greater proportion of the .farmers' capital is 

Ural ma- consequently now invested in machinery than formerly. 

more avail- A good steam-thrashing machine costs nearly 400?. ; small 

farmers cannot afford to avail themselves of all this 

improved and expensive machinery. Not only can they not 

afford it, but a steam-thrashing machine requires for its 

working something more than the resources which a small 

farm can supply; its working must be attended to by 

eight or ten men; the corn is taken from the stack 

by two men, another man has to feed the machine with 

corn; the engine must have an engineer; the straw must 

be carried away by one man, and stacked by another; 

another man must take the grain from the machine, and 

another again will have to carry water to the engine. It 

is true that a great many even of the large farmers do 

not now own, but hire the steam-thrashing machines which 

they use; such a plan, however, is extremely uneconomical. 



Production on a Large and Small Scale, 8i 

A farmer who hires sucli a maclime cannot always obtain 
it at the exact time he may require it; those who let the 
machine must make a profit from those who hire it, and 
for several reasons a high charge must be paid for the 
use of the machine. There is the expense of taking it 
from one farm to another; it is earning nothing when being 
so moved, and the wear and tear caused by dragging it 
along the roads is very considerable. But a small farmer 
who hires such a machine is under still greater disadvan- 
tages, for he not only has to hire the machine, but must 
also hire the men to work it, since he has not enough men 
in his own employment. Men who are hired in this 
irregular way must be paid more than the ordinary 
labourer, whose employment is constant, for they have to 
sacrifice much time in moving from place to place in quest 
of this irregular employment. Such a farmer will not be 
able to thrash his corn at the time most convenient to him ; 
he must thrash it when he can get the engine and hire the 
men. 

Small farming generally involves small fields ; these fields Fields are 
will be surrounded by hedges, and must be approached by ^^'"^'^^'^ 
roads, and thus a great deal of land is wasted ; the disad- 
vantage of small fields will be greatly increased when 
steam cultivation is introduced. The steam-plough requires 
considerable breadth of land upon which to work ; at every 
turn that the plough makes, time is lost; after the centre 
of the field has been ploughed, the headlands will remain 
to be ploughed separately; the labour of moving the engine 
from field to field is considerable; much time may be thus 
wasted, and in fact it has been calculated that a steam- 
cultivator would plough a square field of ten acres in half 
the time occupied in ploughing two fields of five acres 
each, and at two-thirds of the expense. 

Many kinds of labour on a small farm are less pro- «^**^ labouir- 
ductive than on a large one. Thus a flock of 400 shee^ {ZlTp^J^. 
requires as many shepherds as a flock of 800. Each ductive. 

G 



82 Manual of Political Economy. 

farm has a carter, whether the farm is 300 acres, or 600 
acres. Again, much of the time and energy of a small 
farmer is frequently wasted, for he would often be able 
to superintend his farm quite as well if it were larger. 

These and many other considerations show that large 
farming now possesses advantages over small farming, and 
that these advantages are destined to become more decided 
as the use of agricultural machinery is extended. Under 
large farming labour can be made to wprk with greater 
efficiency; capital can be applied with greater effect because 
it can be converted into the most complete machinery, less 
land will be wasted in useless hedges, and thus large farm- 
ing tends to make the production of wealth more efficient. 
Advantages There are, however, some counterbalancing considerations 
of small ^^ favour of small farming^, which do not apply with so much 

farming. ^ _ ^ , i , n i 

force to the agriculture of England as to that ot some other 
countries. The continental traveller must have remarked 
that the olive, the vine, and other such products which 
require great care, it may be almost said tenderness, in their 
cultivation, are most frequently grown by small farmers ; 
the reason of this is, that the cultivation of products requir- 
ing- such watchfulness and skill could not be trusted to the 
careless apathy which so frequently characterises the hired 
labourer. It is seldom that anyone but a mother will 
bestow the tender care a child needs, and the vine will 
be seldom properly cultivated except by one who has that 
interest in it which can alone be derived from the feeling 
of ownership. Even in England there is a similar advan- 
tage associated with small farming; for all the operations of 
a small farm may be attended by the kindly interested 
watchfulness of the farmer himself, and this advantage is 
more prominently shown in those farming operations which 
require great care. A dairy, for instance, needs a constant 
attention which the large farmers of the present day have 
not time or inclination to bestow; hence, if there is a dairy- 
attached to a corn or sheep farm, the large farmer will 



Production on a Large and Small Scale, 83 

generally underlet his dairy; the farmer supplies all the 
food for his cows, and the person to whom the dairy is let 
has every motive to give his whole and undivided attention 
to those minute details upon which the success of a dairy 
depends. 

The question of large and small farming is often incor- 
rectly confused with the consideration of small landed 
properties. This subject will be discussed in some of the 
succeeding chapters of this work. 



G2 



84 



CHAPTER YII. 

ON THE LAWS WHICH DETERMINE THE INCREASE OF 

PRODUCTION. 

BOOK I. TT7E have in the two previous chapters discussed some 
v-^^lj^ VV of the causes which determine the productiveness 
Conditio7is of land, labour, and capital; we have shown, for instance, 
frm?.eT' ^^'^ ^^^ productiveness of land may be increased by good 
proclitctimi systems of farming, and how the efficiency of labour and 
of wealth. Q^^j^^i j^g^j ]3Q promoted by machinery and by a proper 
combination of labour. But if the land, labour, and capi- 
tal of a country are in the most efficient state of produc- 
tiveness, the production of wealth can only be increased 
by increasing either the land, labour, or capital; for if when 
the land in cultivation is in the highest state of tillage more 
produce from the land is required, it must be obtained by 
bringing a greater area of land under cultivation. Again, 
if all the labour which is employed is in the highest state 
of efficiency, a greater quantity of wealth cannot be pro- 
duced unless the labour of the country is in some way 
increased; similarly, if the capital existing in a country 
is applied to the greatest advantage, and if it supports 
the greatest number of labourers it is capable of doing, 
more labour cannot be employed, and as a consequence 
more wealth cannot be produced unless the capital of the 
country is in some way increased. Hence the laws which 
separately regulate the increase of land, labour, and capi- 
tal, are the laws which combine to determine the increased 
production of wealth. We therefore intend in this chapter 



On the Increase of Production, 85 

to discuss the laws on wliich depend tlie increase of land book i. 
and labour; the next chapter will be devoted to a consi- < — ^■. '.» 



deration of the laws which determine the increase of capital ; 
and therefore the two chapters will complete our investiga- 
tions concerning the laws which combine to regulate the 
increased production of wealth. 

The area of each country is limited, but, nevertheless, ^resh land 
each country possesses much land which is not cultivated, ^i^^^^l 
It would therefore seem that, as far as the production of 
wealth is concerned, each country has the power of increas- 
ing the area of its cultivated land. But land remains 
uncultivated because it will not pay the expense of culti- 
vation; if this is so, it would appear that the area of 
cultivation cannot be extended, because no individual 
would be willing to cultivate land at a loss. In explaining 
what will take place under such circumstances, we shall 
introduce to our readers some of the considerations upon 
which depend the theory of rent, a theory perhaps the 
most important and the most rarely understood in the 
whole range of economic science. 

That land, as a general rule, remains untilled because it 
will not pay to be cultivated, is a proposition which we 
wish the reader to bear steadily in mind. Whenever, 
therefore, fresh land is brought into cultivation we must 
suppose that something has occurred which will cause the 
land to pay for cultivation better than it did before. Agri- owing to 
cultural improvements have frequently enabled land which f^mUm- 
was before unproductive to pay a considerable rent. Thus, provements, 
the present fertility of Norfolk is in a great measure due 
to the introduction of the turnip; this root enables large 
flocks of sheep to be kept, which have fertilised what was 
before a poor soil. At one time Salisbury Plain was a 
great tract of down land which paid scarcely any rent, but 
now, with the assistance of artificial manures, luxuriant 
crops of corn are grown there. Much of the rich fen land 
of the Isle of Ely, which is now rented at 31. an acre, was 



86 Manual of Political Economy. 

BOOK I. forty years since a worthless marsh. In these cases'^ the 
« — 1^ — 1^ productiveness of the land has been increased by special im- 
provements. Cases, however, have frequently occurred, and 
are now constantly occurring, where more land is brought 
under cultivation, not in consequence of agricultural im- 
provements, but because there is a greater demand for the 
or increased produce which is raised from the land. If the population 

demandfor n . . n -n • 

food and ^i a country mcreases, its people will require a greater 
increased quantity of food ; and this food must be obtained either 

value of , , . 1 1 1 1 • 1 • 1 1 • 

X>roduce. by making the land which is already m cultivation more 
productive, or by extending the area of cultivation. If 
at the time this increased demand for food arises there 
are no particular agricultural improvements to be sug- 
gested, the enlarged demand must be supplied by cul- 
tivating more land; but as this land did not previously 
pay for cultivation, and as it would not now be cultivated 
if it did not pay for cultivation, it therefore follows that 
the value of agricultural produce must rise in order that 
the farmer may realise an adequate amount of profit. 
Since land previously untilled is now supposed to be cul- 
tivated, the production of wealth, as we have before 
remarked, is increased in consequence of the greater de- 
mand which, has taken place for food. It is not alone the 
land thus brought into cultivation which is made more 
productive, but all the land of the country becomes more 
productive of wealth; for although there is not a greater 
quantity of produce raised from it, yet the value of the pro- 
duce is enhanced by the increased demand for food. All 
the effects here attributed to an increase of population are 
strikingly exemplified in the progress of a prosperous 
colony. No one can doubt that many of the great natural 
pastures of Australia, which now scarcely pay any rent, will 
in the course of time be cultivated and rented as valuable 
agricultural land. Within the last few years, the area of 
cultivation in Australia has rapidly extended. In 1851 
the population of Victoria was only 80,000; her population 



On the Increase of Production. 87 

is now 500,000. The increased quantity of food which is 
now consumed in Victoria has caused more land to be 
gradually brought into cultivation ; the value of agricul- 
tural produce must consequently have risen, because land 
which is in cultivation now would not have repaid its cul- 
tivators when the population of Yictoria was so very much 
smaller. 

Although we have thus shown, a m-iori, that the value Asthevalue 
of agricultural produce must rise when the demand of a ^^^Tess"^^ 
larger population causes more land to be brought yxnA^T fertile soils 
cultivation, yet it will assist the reader, if we explain the ^^^g^" 
primary causes upon which this rise in value depends. 
Every country possesses land which varies greatly in fer- 
tility ; an equal amount of labour and capital employed 
upon one soil will produce very much more than when 
applied to a less fertile soil. The fertility of a soil, there- 
fore, varies inversely, as the quantity of labour and capital 
required to obtain a certain amount of produce. The 
most fertile land is, of course, cultivated first ; the earliest 
settlers in Australia naturally selected the most productive 
soil ; as the population increases, the area of cultivation is 
extended, and less fertile soils must be resorted to, or, in 
other words, land is gradually brought into cultivation 
which does not return so much for the labour and capital 
expended upon it, as land which was previously cultivated. 
Hence the production of wealth cannot be indefinitely in- 
creased, because the returns to labour and capital diminish, 
as it becomes necessary to resort to less fertile land. It 
may, however, be said, that the most fertile land is not 
cultivated first — that the value of land does not depend 
simply upon the quality of the soil, but also depends as 
much upon its situation. It is, no doubt, quite true, that 
much of the richest land in the world still remains un- 
tilled ; in one country a scanty crop is extorted from an > 
ungrateful soil; in another country, the richest tracts of 
land do not, perhaps, feed a single human being. Eveu in 



88 Manual of Political Economy. 

Australia, land still remains uncultivated whicli is, perhaps, 
naturally far more fertile than the land which is now 
under tillage ; for land which is comparatively poor, if in 
the neighbourhood of such a town as Melbourne, can be 
cultivated with far greater advantage than land much 
Qualified more fertile, but more distant. We had, however, these 
'''^fertde' ^"^ Considerations in view, when we stated that the fef tility of 
in this as- the soil ought properly to be estimated by the labour and 
'''^' ^^"* capital necessary to be applied in order to obtain a certain 
quantity of produce. This definition of fertility would 
take account of all the advantages arising from favourable 
situation. Thus poor land is cultivated in preference to 
land which is naturally more fertile, because the one land 
is in a more favourable situation than the other. It is 
quite possible to suppose that there is uncultivated land 
three or four hundred miles distant from Melbourne, from 
which twice as much produce would be raised, if the same 
amount of labour and capital were applied to its cultivation 
as is applied to the cultivation of land in the neighbour- 
hood of Melbourne; but, when the produce had been 
grown upon the land which is so remote, it would not be 
in that situation where it is required ; it would, in fact, be 
useless, until brought to the place where there was a 
demand for it ; a great amount of labour and capital 
must, consequently, be expended in bringing this produce 
to market from the remote districts where it was grown, 
and, therefore, this labour and capital has been virtually 
expended in obtaining the produce, although it was not 
spent in the actual cultivation of the soil. Comparative 
infertility may thus be more than recompensed by advan- 
tages of situation : a favourable situation often contributes 
as much as fertility of the soil to confer value upon land, 
and therefore, as the word fertile is generally understood, 
it is not correct to say that an increase in population will 
cause less fertile lands to be brought under cultivation ; 
but lands which are less valuable must be resorted to, and 



On the Increase of Production. 89 

therefore the important principle already stated is substan- book i. 
tially correct : namely, that as the area of the cultivation • — ^— 1^ 
is extended, some of the land will require a greater expen- 
diture of labour and capital, in proportion to the produce 
raised, than land which was previously cultivated. This 
principle forms the basis of Ricardo's theory of Eent. 

We have already remarked that the proposition just An in- 
enunciated suggests an obstacle which more or less impedes Z^^^^fJ' 
the continual increase in the production of wealth. The food tends 
reader, for several reasons, finds it difficult adequately to fji^^^aluelf 
appreciate the magnitude of the impediment which in agriml- 
many countries is thus placed upon the production ofXce.^^^" 
wealth. We shall have occasion frequently to recur to 
this subject; we may, however, here make a few more 
remarks upon it with advantage. It may be thought that, 
although less fertile land requires more labour and capital, 
yet the general value of agricultural produce will be but 
slightly affected. For it may be urged that the produc- 
tiveness of the land which was previously cultivated will 
not in any way be diminished, on account of the more 
expensive culture required by the less fertile land, to which 
it is supposed resort must now be had. A portion only of 
the produce which is raised from the land will require a 
greater outlay of labour and capital, the productiveness 
of all the remaining land will be unchanged, and hence 
no serious impediment can be caused to the produc- 
tion of wealth. We must repeat, that when a.n in- 
creased demand for food brings less fertile land into cul- 
tivation, this food is obtained at a greater cost of labour 
and capital, and therefore food becomes more expensive. 
But the value of wheat of the same quality does not vary, 
when brought to market, because one sack of wheat has 
been produced at a greater cost than another; of course this 
is matter of no consideration to the purchaser, but simply 
to the growers of wheat. If therefore it is necessary that the 
price of wheat should rise, in order to make the cultivation 



90 Manual of Political Economy. 

BOOK I. of inferior land remunerative, the price of all the wheat 
cH. VII. ^ gj.Q^j^ must rise in a similar manner, and food conse- 
quently becomes more expensive. If by these causes the 
price of wheat is raised, it is manifest that the farmers who 
cultivate the more fertile land must derive a great advan- 
tage, because the produce which they obtain does not 
require more labour and capital, and yet its price is 
materially increased. The farmers however cannot in the 
long run appropriate this advantage to themselves, as the 
landlords secure it in the form of increased rent. A 
further discussion on this branch of the subject would 
involve the theory of rent ; and this theory does not properly 
belong to the production, but to the distribution of wealth. 
The important proposition we wish to establish concern- 
ing the production of wealth is, that an increased demand 
for food has a tendency to make food more expensive, and 
as such an increased demand is almost always caused by 
an increased population, we may enunciate the principle 
thus : that ks population advances, food has a tendency to 
Tendencies become more expensive. In the enunciation of this prin- 
notto he qW^Xq s^q have employed the word tendency. We believe 

confounded ^ ' i. j ... 

withresuUs. that an example may be thus afforded, which will illustrate 
the great importance of enunciating almost all the prin- 
ciples of political economy, as exerting tendencies, rather 
than as producing actual results. This has not been suffi- 
ciently attended to, and we are convinced that the omission 
has retarded the progress of political economy, and has been 
the source of much of that prejudice and incredulity which 
practical men express towards the conclusions of this sci- 
ence. In mathematics a force is measured by the effects 
which it has a tendency to produce, i.e. which it would pro- 
duce if not counteracted by other forces. The force of gTa- 
vity is estimated by the space through which a body would 
fall in a second of time, if it was acted upon by no other 
force ; this space is sixteen feet ; all bodies, however, do not 
so move, although every particle of matter is acted on by the 



On the Increase of Production. 91 

same force of gravity. A feather floating in the air is book i. 
attracted by the force of gravity, and yet it does not fall , ch. jii. ^ 
through sixteen feet in a second of time ; the feather does 
not fall through this space because the downward motion 
of the feather is retarded by the resistance of the air. 
Although the force of gravity is thus partly counteracted, 
it is not either destroyed or rendered nugatory; its effects 
may appear to be different, but the force of gravity always 
exerts a tendency, whether the tendency be counteracted 
or not, to make a body move through sixteen feet in a 
second of time. It would be very unreasonable to assert 
that the theory of mechanics was erroneous, because other 
forces intervene and modify the effects attributed to the 
action of a certain force. The distrust which is sometimes 
shown towards the principles of political economy is 
equally unreasonable; these principles attribute certain 
effects to certain causes, but the effects will be altered, if 
the causes are modified; these causes, like the forces in 
mechanics, are often affected in their operation by many 
disturbing agencies. For instance, we have enunciated as 
a principle that the tendency- of the increased demand of 
an advancing population is to make food more expensive. 
Political economy however is not in error, because circum- 
stances may occur which will counteract this tendency; 
we are all aware that this tendency towards higher prices 
has been and may be again counteracted; that agricultural 
improvements, for instance, have often been introduced, 
which have enabled the increased wants of a larger popu- 
lation to be supplied without any rise in the price of food. 
The population of Great Britain has increased 4,500,000 Why the 
since 1841, and yet the price of wheat is on the average ^IZutas 
lower now than then ; but this fact does not falsify the not risen in 
principle we have above enunciated. The circumstances ^^^^'*^^- 
which have prevented a rise in the price of wheat are 
patent to all. Before 1848, we were in a great degree 
restricted to our own soil for our supplies of corn. Now 



go Manual of Political Economy. 

BOOK I. we are freely permitted to piircliase wheat from any 
^^^•J^^- ^ country which offers it for sale. Eight million quarters of 
wheat were last year imported, and with better means of 
communication even such remote countries as the Punjab 
and California will regularly export wheat to Great 
Britain. Free-trade has therefore virtually added a vast 
tract of fertile land to the cultivable area of this island. 
Suppose that, in consequence of the great abundance of 
fertile land in the valley of the Mississippi, wheat grown 
.there could be sold in our markets at a less price than 
would a-dequately remunerate the English agriculturist if 
he grew wheat on many of the less productive farms in 
England. Under these circumstances the valley of the 
Mississippi would, as far as the supply of wheat is concern- 
ed, serve England the same purpose as if a tract of fertile 
land could be added to her shores. We are quite ready to 
admit, that the effects attributed by political economy to 
one particular cause, seldom occur with strict exactness; 
such perfect conformity could not take place unless the 
cause acted alone, and this is very rarely the case; the 
practical utility of political economy however is not for 
this reason lessened, for the science demonstrates that 
certain results must ensue, if a counteracting influence 
does not come into action. We will illustrate our meaning 
by referring to an argument, which we believe is unanswer- 
able when urged in support of free-trade. The population 
of England is advancing ; if we are restricted to our own 
soil for supplies, then food will be obtained at a greater 
cost of labour and capital, and food must ultimately become 
much dearer. It therefore becomes most important that 
the fertile soil of the whole world should, as far as possible, 
be made available to supply us with the produce we may 
require. 
Increase in We must next consider how the production of wealth 
\ngpopu-' ^^ affected by an increase in the amount of labour, or, 
lation. in other words, by an increase in the number of the 




On the Increase of Production. 93 

labouring population. Labour is increased when it is 
made more efficient. If a machine is introduced which 
enables one labourer to do the work of six, of course the 
amount of labour in the country is augmented, but this in- 
crease is due to improvement in the efficiency of labour, 
a subject which was considered in the last chapter. We 
must here therefore restrict ourselves to a discussion of the 
consequences which result, when an increase in the num- 
ber of the labouring population causes more wealth to be 
produced. If a greater quantity of any commodity is 
required, a greater number of labourers must be employed, 
unless some industrial improvements are introduced. Sup- 
pose, for instance, there suddenly arose a very active de- 
mand for English cottons in China; a much greater number 
of labourers would soon be engaged in cotton manufactories. 
It may be asked, How is the increased number of labourers 
to be obtained? Surplus hands will be drawn from other 
employments, and emigration will be checked, if there is 
a great demand for labour. If the demand for additional 
labour continues, an increase of population will be power- 
fully stimulated, and the labour required will ultimately 
be supplied principally from this source. It is important 
to point out in what manner an increase of population is 
promoted by an active demand for labour. 

Labour is in demand when trade is good ; then wages are Influence of 
high, and the labourers are prosperous. It is found that f^/i^i^our 
the number of marriages amongst the poorer classes is upon the 
invariably much greater when the labourers are prosperous, ^oml^tion. 
There is no surer test of the prosperity of the labouring 
class than the low price of bread, and there are few statistical 
facts better substantiated than that the marriages amongst 
the labouring class increase with the fall in the price of 
bread. It may be reasonably assumed that wages are high 
when trade is good. But from what source are these 
higher wages supplied? It must be from the capital of the 
country, because this is the fund from which the labourers* 



94 



Manual of Political Economy. 



BOOK I. 
Ctl. VII. 



Relation 
hetioetn in- 
crease of 
population 
and in- 
creasedpro- 
duction 
from land. 



Exemplifi- 
cation of 
these prin- 
ciples in 
late years. 



wages are provided; the circulating capital employed in 
any trade or manufacture must be increased if the labour- 
ers engaged in it receive higher wages. We may here 
generally remark, that when a trade is active the profits 
are high, and thus a great inducement is offered to those 
engaged as employers in the trade, not only to save more, 
but to apply a greater amount of capital to their business ; 
thus additional capital is either borrowed or is withdrawn 
from other investments. But now, having pointed out 
some of the sources from which an increased number of 
labourers will be obtained, we have next to consider how 
this increased population will be fed. We have just re- 
marked upon some of the sources from which the addi- 
tional wages paid to the labourers will be supplied when 
an active trade causes a greater demand for labour. Let 
us suppose, therefore, that when the labouring population 
has increased, the circulating capital of the country has 
been proportionately augmented; but if there is a larger 
population, more food will be required, and the important 
question arises. Under what conditions is this food to be 
obtained? In answering this question we avail ourselves 
of that principle which has been so carefully stated in the 
first section of this chapter, namely, that there is a tend- 
ency for food to become more expensive as the demand 
for it increases, because less fertile land has to be resorted 
to, the returns from which are not so large in proportion 
to the labour and capital expended upon it. 

The production of an increased quantity of wealth re- 
quires a greater number of labourers, and when the labour- 
ing population is thus augmented food will become more 
expensive, unless the additional food required can be 
obtained either by agricultural improvements, or can be 
imported at a comparatively cheap rate from other 
countries. All that we have here, stated is strikingly 
exemplified by the events which have occurred within the 
last few years. The trade of the country has advanced 



On the Increase of Production, 95 

with marvellous rapidity, the number of labourers now 
engaged in the manufacturing industry of this country 
exceeds by many millions the number employed twenty 
years since. The capital invested in our manufactures has 
even advanced more rapidly than the increase of popula- 
tion. Not only are there more labourers, but the wages of 
these labourers have risen very decidedly within the last 
few years. Two causes, therefore, have combined to increase 
the demand for food, namely, a larger population and a 
better paid labouring class. This increased consumption 
of food is abundantly verified by the import tables ; although 
England's own soil has been made far more productive, and 
much more land has been brought under cultivation, yet 
the importation of all the common necessaries of life con- 
sumed by the labourers has been largely augmented. But 
it may be said, political economy would predict that, in 
consequence of such a demand, all food will become more 
expensive; and yet bread is cheaper. Now, however, as we 
have before remarked, we have the whole world from which 
to obtain our supplies of wheat, and the cost of carrying 
wheat from one country to another is comparatively small. 
There has, however, been a most decided rise in the value 
of those articles of food which we cannot with such facility 
obtain from other countries. For instance, it is much 
more difficult and much more expensive to import meat 
than corn. Meat must reach a scarcity price in England 
before it would be remunerative to send cattle and sheep 
from even the eastern shores of America, and yet corn has 
this year been imported with considerable profit from the 
remote regions of California. Since, therefore, we are to a 
much greater extent restricted to our own soil for meat and 
dairy produce, importation has not been able to counteract 
that rise in the price of these articles which, according to 
political economy, must accompany the increased consump- 
tion of a more numerous and better paid labouring class, 
and the result has been that meat and dairy produce have 



o6 Manual of Political Economy. 

become fifty or sixty per cent, more expensive within the 
last few years. In all probability the trade and commerce 
of England will steadily progress ; the labouring popula- 
tion will increase, but the vast capital which is constantly 
being accumulated will supply the advancing population 
with as high if not higher wages. Every year, therefore, 
a greater quantity of food will be consumed in this country ; 
but the area from which this food may be obtained is 
rapidly being extended into every quarter of the world ; 
new sources of cheap food are being opened and developed 
in our colonies and dependencies by English capital and 
by English emigration. Before many years have passed 
a railway will be carried into the heart of the Punjab, 
and in the opinion of the late Lord Dalhousie, India vnll 
then supply to our markets wheat of an excellent quality, 
at twenty shillings per sack. England's labouring popu- 
lation may, therefore, continue to increase for many years 
to come without any rise in the price of those articles of 
food which can be easily imported. As meat and dairy 
produce, however, cannot to any great extent be supplied 
to us from distant countries, there can be no doubt that 
meat and dairy produce must greatly rise in price com- 
pared with corn, and an inevitable tendency will thus be 
exerted to make England produce more stock and grow 
less corn ; and it, therefore, appears that much of our pre- 
sent arable land may again be restored to pasture. 



97 



CHAPTER VIII. 

ON THE INCREASE OF CAPITAL. 

IN the preceding chapter we have remarked upon some of book t.' 
the more prominent conditions which determine the ^ffl^Zil^ 
increased production of wealth, as far as it depends upon increased 
an increase of the cultivated land, and upon an increase If^^^^lfj^"' 
in the number of the labouring population. But larger implies an 
production also requires an increase of capital. It must *^^'^^^f ^"^ 
be evident, from the remarks we have made upon capital, 
that an increase of capital is as essential to a larger pro- 
duction of wealth as an increase of land and labour. If 
land, for instance, is more highly cultivated, additional 
capital must be applied to it ; and new land cannot be 
brought under cultivation without the application of 
capital to it. If more labourers are employed, a larger 
fund, in the form of circulating capital, must be devoted 
to pay their wages. Improvements in the process of 
industry cannot be introduced without the expenditure of 
capital. Machinery, warehouses, manufactories, railroads, 
ships, all such industrial appliances as these, exhibit the 
various modes in which the fixed capital of a nation assists 
her industry. 

We have previously asserted as a fundamental proposi- and, there- 
tion that capital, whether fixed or circulating, is the result "^^gj^g^" 
of saving. Increased capital, therefore, implies increased saving, 
saving ; and hence we may determine the laws which re- 
gulate the increase of capital by considering the causes 
upon which depend the increased saving or accumulation 

H 



9 8 " Manual of Political Economy. 

.BooKT. of wealth. There are two principal motives wliicli induce 
< — 1^ ' ' men to save ; and these are, first, a prudent foresight with 
regard to the future ; and, secondly, a desire to make 
which may wealth by an advantageous investment. The first motive 
uoo^wfives ^^ ^y ^^^' ^^^^ more powerful. To its action has been due 
—foresight the greater part of all wealth which has been saved. But 
and desire ^|^^ gecond motivo is the chief cause of fluctuations in the 
amount of a nation's capital. Whether the amount of 
capital at any time existing in the country is above or 
below the average is almost entirely determined by the 
profit which it may be thought the capital will realise. 
This profit may be estimated by the current rate of 
interest. But in political economy, as in many other 
sciences, the causes which produce the disturbing fluctua- 
tions require a more careful investigation than those causes 
whose action is more constant, and more undeviating. 
The earth when revolving in its orbit is acted on by a great 
number of forces. It is attracted by every body in the 
planetary system, yet these forces combined are almost 
immeasurably inferior to the force of attraction which is 
exerted by the sun. Most important mathematical inves- 
tigations, however, depend upon the action of these dis- 
turbing forces. Similarly, in political economy, the effects 
of the more constant causes can be readily estimated ; but 
causes more varying in their action introduce fluctuations 
and disturbances which must be investigated and classified 
by the scientific principles of political economy. 
Importance Nothing more distinctly marks the superiority of man 
sire to at ^^^^ *^® brute Creation than the prudent foresight which 
eumulate causes an adequate provision to be made for the future. 
The more civilised men are, the more is this foresight 
shown. Civilised men anticipate,- with keen perception, 
the wants of the future. To provide against the contin- 
gencies of the future engrosses, perhaps, the too anxious 
care of the nation. The precept that the morrow will take 
care of itself is disobeyed with scrupulous anxiety by civi- 



On the Increase of Capital. 99 

lised men, and implicitly followed by those tribes who still ^^^^ ^• 

' i J J . . . . CH. VIII. 

grovel in a Vv^retched barbarism. The Jesuit missionaries, ^ v ' 

who a century since formed a settlement in Paraguay, 
found the great difficulty they had to contend with was the 
utter recklessness of the people. The missionaries gave 
them seed. They knew that this seed would, if sown, in 
a few months yield them a plentiful supply of food, yet 
they could not be restrained from eating the seed instead 
of sowing it; the smallest present enjoyment was by them 
preferred to the greatest prospective advantage. People 
in such a condition can be very little superior to the more 
intelligent animals, whose hereditary instincts induce them 
to provide against danger which they may have to encounter. 
Birds build nests which are most perfectly adapted to pro- 
tect their young; beavers construct their habitations on a 
plan so admirable that it seems almost to rival the skill of 
man; and even dogs collect a store of food to which they 
will resort when pressed by hunger. 

In England the desire to accumulate wealth acts with Its strengfh 
great force. It is impossible accurately to define the causes ^'^^^^9^^^^. 
which regulate the amount saved by any individual, but it 
may be stated generally that in England each class of 
society has a recognised standard of living which involves 
a certain expenditure, and the whole of an individual's 
income which is in excess of this expenditure is usually 
saved and invested with great care. The amount which is 
saved is, therefore, partly dependent at any particular time 
upon the material prosperity of the country. If activity 
of trade or any other such circumstance should increase 
the incomes of any particular class, the annual incomes of 
this class would be augmented: there would be a larger 
fund from which savings might be made, and more would 
be saved. Habit, far more than the amount of an indivi- 
dual's means, usually determines his expenditure. A man 
whose income for some time having been uniform was 
suddenly doubled,, would very probably save the greater 

H2 



100 Manual of Political Economy, 

BOOK I. portion of his additional income. Any circumstance, there- 
CH. Yiii. £^^^^ which tends to augment the wealth of the nation, will 



induce increased saving. There is no doubt, however, that 
the majority in this country, if we except the worst paid 
labourers, could save more than they are accustomed to 
save. There are few in the middle and upper classes of 
society who do not spend considerable sums on useless 
luxuries and unprofitable enjoyments. Hence the capital 
of the country will be augmented by any circumstance 
which makes the people more economical. 
The amount It may also be remarked that the amount of an indi- 
umtrUv '^i^^^^l's expenditure is to some extent determined by the 
determined cost of the commodities which he consumes. The con- 
the articles ^^"^V^^^"^ of some articles diminishes in proportion to the 
consumed, rise which may take place in their price. It has, for 
instance, been found that when the sugar duties have been 
raised beyond a certain amount, they do not produce a 
larger revenue. The rise in the price of sugar induces 
large numbers to give up its use. Such articles, however, 
as tea and bread are, in this country, almost universally 
regarded as necessaries of life; and the quantity of tea 
and bread which is consumed by those classes who accumu- 
late the capital of the country, is not materially affected 
by a variation in the price of these commodities. If, 
therefore, bread and tea decline in price, household ex- 
penses of the middle and upper classes will be diminished, 
and a larger portion of their income will remain to be saved 
as capital. We mention this as applying particularly to 
the middle and upper classes, because there is no doubt 
that our labouring population would gladly consume a 
greater quantity, even of the ordinary necessaries of life, 
had they the means of purchasing them. If the price of 
tea is reduced one-half, the labourers will probably con- 
tinue to spend upon this article as much as they had pre- 
viously done ; they would spend less upon bread if its price 
was reduced, but the amount which they thus saved would 



On the Inci^ease of Capital, loi 

not, as a general rule, be invested by the labourers as book i. 
capital, but would be applied to satisfy some of the many > — 1.^ — 1> 
wants of life, which they have not the means of gratifying. 
The labourers therefore are benefited in two distinct ways, 
by the cheapening of any article of ordinary consumption. 
They have, in the first place, to pay less for it when they 
purchase it, and secondly, the cheapening of such a product 
has a tendency to augment the capital of the country, by 
enabling the middle and upper classes to increase their 
savings, and the labourers will receive higher wages if capi- 
tal is increased. 

We have however before remarked, that the fluctuations Causes of 
in the amount of capital which is saved, depend upon the Jr^^j^^^^^'^^ 
nature of the opportunities which present themselves for in- amount of 
vestment. If the profits which can be realised upon capital *^^^*^'^* 
increase, a greater inducement is offered to save, and a 
larger amount is sure to be saved. From such a source, 
either directly or indirectly, any large increase of capital 
which may be required is mainly supplied. At any par- 
ticular time there is a certain interest upon capital which 
people expect, and with less they will not be satisfied. But 
it will perhaps be said, what does a capitalist do with his 
capital; if he wants 3-|- per cent, interest, and can only 
obtain 3 per cent., he will not squander it because he is 
not satisfied with so low a rate of interest; will, therefore, 
less wealth be saved? Less no doubt will be saved, because 
a low rate of interest offers less inducement to save ; the 
most important point however to be borne in mind is, that 
a much smaller portion of the wealth which is saved will 
be invested as capital in our own country, when the rate 
of interest is low. England, far more than any other 
country, offers a striking example of the vast amount of 
capital which the people are ready to invest, if a favourable 
opportunity presents itself When the government requires 
a loan, many millions are at once subscribed, without 
encroaching in the slightest degree upon either the circu- 



102 Manual of Political Economy. 

BOOK I. lating or fixed capital of the country. The loan is not 
' — 1^ ,■■> altogether supplied from capital which was previously 
Foreign in- unemployed, bat England has vast sums invested in almost 
z-estments. , ^ygj^^ civilised Country. Magnificent as are the tokens of 
England's wealth which surround us on every side, yet our 
manufactories, our railroads, our mercantile marine will 
not give us an adequate idea of England's riches, unless 
we remember that tliere are few countries either in the 
new or the old world that are not our debtors. Russia, 
Turkey, India, Australia, Canada, the United States, the 
Republics of South America, all have satisfied their state 
necessities, by loans supplied from English capital. But 
it is not only foreign governments who borrow from us; a 
vast number of the foreign speculations have been sup- 
ported by English capital. The greater part of the 
railroads throughout the world have been made by English 
capital ; the Grand Trunk Railway of Canada has absorbed 
15,000,000Z. of English capital; a large portion of the 
shares in French railways was originally held in this 
country; in the last twelve years, ■ England has subscribed 
11,000,000^. towards Indian railways. Her irrigation 
works and her roads have been constructed by English 
capital, and some of the richest mines in South America 
have been worked by English companies. Consequent^ 
only a small portion of the, wealth which is annually 
accumulated in England is retained to be invested in this 
country. If, therefore, England requires a greater amount 
of capital to extend any branch of trade or to carry out 
any public v/ork, she can supply an amount which is prac- 
tically unlimited. If, for instance, there was such an 
expansion in our cotton manufacture, that 100,000,000/. 
of additional capital was required, it would be readily 
obtained, by placing some slight check upon the invest- 
ments of English capital abroad. The amount of capital, 
therefore, which is applied to the production of wealth in 
this country, does not so much depend upon the amount 



On the Increase of Capital. 103 

which is saved, as -upon the proportion retained by the bookt. 
country itself of all the wealth which is saved. The ._2^:J5!:. 
relative amount of the English capital which is invested at 
home and abroad is regulated by many considerations, the 
chief of which is, the rate of interest which can be obtained 
at home compared to that which can be obtained in 
foreign countries. We must postpone the further dis- 
cussion of this most important subject, until we reach 
those chapters which treat of profits. 

It should always be borne in mind that a most serious Economical 
error will be committed if the economical condition of^y^/JlvL 
England is taken to be the type of the economical condition countries as 
of other countries. England, in many respects, offers a ^^ig^^^g^f 
direct antithesis to other countries ; thus, she possesses an production. 
almost unlimited capital, but has very little fertile land at 
the present time uncultivated. India and many other India has 
countries are very deficient in capital, but possess vast ^/landand 
tracts of fertile land still untilled ; therefore, contrasting ^a&owr, '^w^ 
England and India, the increased production of wealth J^^^'^ ^^' 
will take place under very different conditions in the two 
countries. In England capital is readily supplied to assist 
an increased production of wealth. The labourers' wages 
will probably rise when the industry of the country is 
active. There may, however, be one drawback to the 
benefit which they thus derive. As the tract of fresh 
soil which England can bring under cultivation is so 
limited, the price of many articles of food will rise, in con- 
sequence of the larger consumption of a more numerous 
and better paid labouring class. India, in her present 
condition, has a most abundant supply of land and labour, 
but her capital is so restricted that it is difficult for the 
production of wealth to increase unless capital is obtained 
from other countries. Under such circumstances, it is 
quite possible to conceive that the labourer in India may 
suffer, if the demand for some of her products should 
stimulate her industry. Capital and labour do not readily 



104 Manual of Political Economy. 

BOOK T. flow in India from one district to another, and, therefore, 

OIT VTTT 

we may regard each district in the light of a distinct 



country. Let us then suppose that in some province in 
India a much larger quantity of silk is grown now than 
formerly, in consequence of England's demand for silk. 
The capital of the province will probably not be largely 
increased, since England will for some time hesitate to 
invest capital in an industry carried on without her super- 
vision. The capital now supposed to be invested in the 
culture of silk will to a great extent have been withdrawn 
from other employments, say, for instance, from the culti- 
vation of the land. But if less capital is applied to the 
cultivation of the land, less food will be produced ; food 
will become more scarce and expensive, and a serious 
injury may be inflicted upon the labourers of this province 
in consequence of the rise of a new industry. 
Thas Eng- It is evident, from our previous remarks, that in Eng- 
(TeapflTd, ^^^^ ^^® great requisite for the increased production of 
and India Wealth is a large supply of cheap food. This cheap food 
(Mpi a . ^^y -^^ obtained either by importation, by agricultural 
improvements, or by extending the area of land cultivated 
in England. Industry cannot be for any length of time 
impeded in this country by any want of labour and capital, 
but in India an increase of capital, both flxed and circu- 
lating, is most essential to a larger production of wealth. 
She possesses an abundant supply of fertile land and of 
cheap labour, but for some time to come the greater portion 
of the additional capital applied in India must be obtained 
from England. Ages of anarchy have produced a wide- 
spread feeling of insecurity throughout India. Individuals 
have been afraid to exhibit their wealth, because it would 
tempt the rapacity of those who have tjie power to pillage 
their weaker neighbours. A great part of the wealth 
saved was hoarded, and it consequently performed none of 
the functions of capital. The owners of property felt that 
it was only secure when it could be concealed. If they 



On the Iticrease of Capital. 105 

employed labourers, they could not feel certain that they 
would be able to retain the results of the labourers' in- 
dustry. Hence we can reasonably anticipate one most Useful re- 
beneficent result from England's rule in India ; for her ^^^^f, ^^ 
power, m course of time, may make every class m India connexion 
feel that the rights of property shall be respected. Nothing ^^t^^^g- 
Avill more tend to increase the capital, and hence the wealth 
of the country; for when security is given to property 
there is a great inducement to save, and the wealth which 
is saved, instead of being hoarded, will be usefully applied 
as capital to assist the further production of wealth. India 
is at the present time deriving the greatest possible ad- 
vantage from England's rule. No other country has the 
power of conferring such benefits upon India. England is 
annually spending 7,000,000^. upon Indian railways; and 
this important addition to India's capital is supplied for 
the most valuable of all purposes. As we have before 
remarked, want of capital is the great impediment to 
India's prosperity; but the causes which prevent the in- 
crease of capital in India affect fixed capital more than 
circulating capital. The investment of wealth in the form 
of fixed capital implies great confidence in the security of 
property and in the stability of government. Property in 
the form of fixed capital can be readily destroyed; and 
undertakings of great public utility, such as railroads, 
canals, and irrigation works, cannot be carried out unless 
a great number of individuals combine their capital. Such 
a combination requires that men should repose in their 
fellow-men an amount of confidence which implies a some- 
what advanced civilisation; and no other country except 
England is sufficiently wealthy to supply India with such 
vast sums of capital. 

Although there are so many points of diversity between 
England and India, yet there are other countries whose 
economical condition differs most essentially from either 
that of England or India. The main requisite for the , 



io6 ManudX of Political Economy, 

BOOK L increased production of wealth is, in India, an increase of 
> — ^-v — 1> capital, and in England, an increase of land, or, in other 
In the West words, an increased supply of cheap food. In the West 
iTabund-'^ India islands, however, there is an abundance of land and 
ance of Capital, but a great scarcity of labour. The decline in the 
capital^ but Prosperity of these islands is, in an economical sense, most 
liifJe la- instructive. Previous to the emancipation of the slaves, 
the West Indies possessed all the three requisites of pro- 
duction; their soil was fertile, it was owned by English 
proprietors, who readily supplied all the capital that was 
required, and labour was, of course, never deficient when 
slaves could be freely imported, and when there was an 
abundance of money with which to purchase them. But 
the abolition of slavery not only freed the slave, but 
effectually checked the importation of labour. Property 
in man was declared to be illegal, and therefore no one 
would resort to the expense of importing labour when he 
had not the power to retain the services of the labourers 
he imported. The emancipated negroes of the West 
Indies are, of course, unwilling to do as much work as 
when labour was extorted from them. Degraded by their 
bondage, their wants were few, and easily satisfied; the 
rich fertility of the tropics supplies them with almost all 
the food they require, with the exertion of very little 
labour. Why should they, therefore, constantly toil? they 
have few tastes to gratify, and few wants to satisfy. No 
one will labour for labour's sake ; the emancipated negroes 
are well fed almost by the spontaneous bounty of nature, 
and they are therefore perfectly contented to live a lazy life 
Conse- of repose. The consequence of this is that the production 
furde/'^ of wealth has almost ceased in many parts of the West 
cienc)/. Indies; the land is as fertile as it was before. English 
proprietors would only be too glad to supply capital if they 
could find the labourers upon whom the capital might be 
employed; but this labour is not forthcoming, the produc- 
tion of wealth cannot proceed, and estates, which before 



071 the Increase of Capital. 107 

1833 were worth 10,000^. a-year, are now little more 
than a useless burden to then- owners. It is thus quite 
evident that it is impossible for the West Indies to become 
more prosperous without a larger supply of labour. How 
is such a supply of labour to be obtained ? In the first 
place, labourers maybe imported; secondly, the population 
of the islands may increase, and the people may become 
more desirous to labour, as their wants become gradually 
enlarged. Let us first consider the importation of labour. Difficulty 
Labourers may pass from one country to another entirely ^yl^J.^ 5^ 
of their own accord. Large numbers of Chinese have importing 
emigrated to Australia because they could earn higher " ^^^' 
wages in Australia than in China. Australia never took 
any steps to encourage their coming ; their presence is, in 
fact, so much objected to, that an extreme measure has 
been passed, and a poll-tax of 10^. has been imposed on 
every Chinese who lands. If the Chinese felt that equal 
advantages were to be secured in the West Indies, no 
doubt great numbers would emigrate to these islands, and 
thus supply the labour which is so much needed. It is, 
however, a singular fact, that the English, the Germans, 
and the Chinese are the only people who freely emigrate at 
the present day*. Now it is quite impossible for English 
or Germans to work in a sugar plantation under a tropical 
sun ; if, therefore, the Chinese will not resort in the same 
way to the West Indies as they have to California and Aus- 
tralia, the West Indies cannot depend upon a supply of 
labour from voluntary emigration. By voluntary emigration 
I intend to signify that th-e emigrant seeks the country to 
which he goes, and that the country does not seek the 
emigrant. For instance, the coolies are not voluntary 
emigrants. A government votes a certain sum of money 
to fit out ships which sail to the Malay Archipelago. The 
natives are canvassed to emigrate, their expenses are paid, 

* I here use, as in other places, the word English to describe the inhabi- 
tants of the United Kingdom generally. 



io8 Manual of Political Economy, 

BOOK I. and they are promised work when they arrive at their 



CH. VIII 



destination. Large numbers of coolies have in this manner 
been imported to the Mauritius and the West Indies, but 
the traffic is liable to be abused, and the coolies have 
occasionally endured on their voyage sufferings which seem 
to revive some of the horrors of the slave-trade. The 
coolie-traffic can never be carried on by private enterprise, 
because, if an individual imported coolies, he would have 
no power to compel them to work for him in preference to 
another person. If such a power were permitted, there 
would cease to be any real distinction between the coolie- 
traffic and slavery. 
other The population of the West Indies is, as we before 

remedyma remarked, too lazy to work ; and the only hope of making 
the evil. the people more industrious, is to stimulate in them new 
desires and new wants ; they will not, of course, work as 
long as they are content to obtain little else but the food 
which the islands supply in abundance. If they can only 
be made more anxious to have expensive clothing or 
expensive food, which may perhaps have to be imported 
from other countries, they will at once have a motive to 
work, and the West Indies will cease to suffer from the 
present great scarcity of labour. England, therefore, offers 
a striking contrast in every respect to the West Indies; 
nothing can exceed the ceaseless industrial activity of the 
English people. We all of us labour, because there is 
some desire which we wish to gratify. Our labourers are 
pressed on to continuous labour by the necessity of pro- 
curing a livelihood. Our climate is rigorous, and the 
bounty of nature will not supply us with the means of 
supporting life unless we work with energy and with 
constancy. The middle classes are urged on to industrial 
activity by the desire to improve their social and material 
position. 
In America 'j'j^g economical condition of America, as far as the pro- 

land and ^ - n • • . 

capital are duction of wealth is concerned, differs in some respects 



On the Increase of Capital. 109 

from each of the three countries we have considered. In ^ook i. 
America, labour is comparatively more scarce than either ^ — ly *> 
land or capital. We say comparatively more scarce, hQ- plentiful, 
cause in the West Indies the scarcity of labour is so great ^^^//!*^^'' 
that the production of wealth is almost entirely prevented ; 
but this is not the case in America, for in no country has 
the production of wealth advanced with greater rapidity. 
If, however, we compare America with England, we know 
that land is much cheaper in America and labour much 
dearer: and one of the consequences of this difference is 
strikingly exemplified by a circumstance which has been 
noticed by almost every traveller in America, but which 
has been seldom explained. America is ill cultivated 
compared with England, and her agriculture appears to be ^ff^^ts of 
most slovenly ; there must be some cause for this differ- agrlcut^ 
ence ; it cannot be explained by that never-failing resource ^^*''^- 
of shallow thinkers, a difference of race. An agriculturist, 
who may in England have cultivated his farm like a 
garden, will, if he emigrates to America, find it greatly to 
his interest to adopt a very different system of tillage. 
The reason of this may be best shown by an example. An 
English farmer, let us suppose, cultivates a hundred acres 
of land, for which he pays 200^. a-year rent. 200^. a-year 
expended in wages on his farm will return the farmer a 
fair profit for his capital and his exertion; but he may 
think that it will answer his purpose to farm more highly, 
to employ twice as much labour as before. He will be 
remunerated for the additional 200?. which he expends on 
wages, if the increased produce from the farm sufficiently 
exceeds the cost of this extra labour to leave the farmer a 
fair profit on the additional capital he has expended. If 
this is the case, the additional labour will be as profitable 
to the farmer as that which he first employed, but it will 
not be so productive. When only 200Z. was expended on 
wages, the produce of this labour must have been sufficient 
not only to return a fair profit upon the amount expended 



no Manual of Political Economy. 

in wages, but must also have been sufficient to cover the 
rent. If the additional labour employed diminishes in 
productiveness, it may be said why not apply it to other 
land ? it cannot, however, be applied to equally good land 
without having to- pay a rent for the use of the land ; hence, 
up to a certain point, it is more remunerative to apply 
additional labour to the same land, although the labour 
diminishes in productiveness, rather than to apply the 
labour to other land for which rent will have to be paid. 
But if good land was extremely plentiful, or, in other words, 
rents were extremely low as in America, it would mani- 
festly be far more profitable to cultivate fresh land rather 
than apply additional labour upon land already imder 
tillage in order to cultivate it more highly. Hence, in 
America much less labour is employed in the cultivation 
of a certain area of land than would be employed upon the 
same area in England, and farming is consequently more 
slovenly in the former than in the latter country, because 
in the one country land is cheaper than in the other, and 
labour dearer. 
Compari- In this and the preceding chapter, we have investigated 
different ^ '^^^^ ^^^^ wliich regulate the increase of land, labour, and 
results ob- capital. These laws combined, furnish the conditions 
upon which depend an increase in the production of 
wealth. We have attempted to illustrate the manner in 
which these laws may be combined, by considering four 
countries, England, India, the West Indies, and America; 
and in each of these countries the requisites for an in- 
creased production of wealth assume, relatively, different 
degrees of importance. In England, an abundant supply 
of cheap food is most required; in India, an increase of 
capital is most essential; and in the West Indies, an 
increase of labour. In America, as in England, the 
production of wealth meets with no serious impediment, 
for it advances with the most extraordinary rapidity. Yet, 
in America, there is a comparative scarcity of labour, and 



talned. 



On the Increase of Capital. 1 1 1 

an ample abundance of land. America and England ^^ok i 



have conferred upon each other the most important 
mutual benefits. Cheap food is essential to England's 
progress, and our greatest supplies are obtained from 
America. Cheap labour is the most valuable gift to 
America, and our' surplus population, which would be- 
come burdensome to us if there had been no emigration, 
has provided America with the labour she so much needs. 
We have now considered all the more important propo- 
sitions which concern the production of wealth. We 
shall frequently recur to this portion of our subject, and 
thus the reader will obtain a firmer grasp of many of the 
principles we have discussed. We now pass on to the 
next branch of our subject, which is the distribution of 
wealth. 



CH. VIII. 



BOOK 11. 
DISTRIBUTION'. 



CHAPTER I 

PKELIMINARY REMAEKS ON PEOPERTT. 

HAVING considered the production of wealth in the book n. 
last book, we now pass, by a natural sequence, to < — ~v— — 
expound the principles which regulate the distribution Distrihu- 
of this wealth. We were compelled, in some of our re- ^^J^i^l 
marks on the production of wealth, to anticipate the fact 
that the wealth produced is distributed amongst different 
classes. We have spoken of the wages of the labourers, 
of the profits of the capitalist, and of the rent of the 
landlord. We have also alluded, in general terms, to 
some of the sources which supply the wealth thus dis- 
tribtited; for instance, we could not explain the subject 
of capital, without showing that the capital of the country 
is the fund from which the wages of the labourers are 
supplied, and, therefore, if the capital increases, the wages 
paid must increase. Although we have been compelled, 
in this manner, slightly to encroach upon the subject of 
the distribution of wealth, yet we have hitherto said 
nothing upon the principles which determine the relative 
amounts of the shares into which wealth is distributed. 
It, therefore, remains for us to explain why wages are 
high or low, why profits rise or fall, and why rents in one 
country vary so greatly in amount at different times and 
in different places. This book, therefore, will probably 
be more interesting than the last, because in it we shall 
discuss questions of the gTeatest practical importance ; we 
shall have occasion to show how wages and profits are 

l2 



ii6 Manual of Political Economy. 

affected by sucli combinations as strikes, and how industry 
is influenced by the different tenures of land which exist 
in different countries; the subjects discussed will, in fact, 
have equal interest for the philanthropist and the trader, 
for we shall be able to explain to the philanthropist the 
poverty of the poor, and suggest remedies for its allevia- 
tion, and we shall be able to point out to the trader the 
conditions which regulate the profits secured in commerce. 
The distri- Distribution of wealth implies the idea of property. If 
tveait/i %i- "tbere was no property, or, in other words, if no individual 
plies pro- could possess anything which he could claim as his own, 
^^^ ^' there could of course be no distribution of wealth. Every 

one would then obtain, either by chance or by force, the 
food and other necessaries which minister to the wants of 
life. It is impossible for property to exist until society 
is organised, for the fundamental idea involved in property 
is this, that those who own the property possess in it a 
right, which will be enforced by law; but the existence of 
laAV implies that a people composing a state or a nation 
will exercise a combined power to make individuals regu- 
late their conduct according to certain rules termed laws. 
Such combined action constitutes the power of govern- 
ment, and the government ceases to exist if it is not able 
to exercise its power and enforce obedience to its laws. 
A great portion of the laws of every nation concern pro- 
and is af- perty; such laws vary greatly in different countries and at 
ifectedhy (different times, and property has rights in one age of a 
ferent laws nation s existence which it has not m another. In some 
about pro- cQ^^^tries at the present time, there is, as far as the rights 
of property are concerned, no difference between slaves 
and horses. Before the passing of the Act of Eman- 
cipation, a negro, if purchased by an English colonist, 
became as much his property as an articJe of domestic fur- 
niture. In feudal times, a baron could enforce various per- 
sonal services from those who occupied his land ; they were 
bound to furnish him, if he waged war, with a certain 



Preliminary Remarhs on Fro-pertij. 117 

number of men, horses, and coats of armour. There is, book 11. 
again, the greatest difference in the control which can be 



CH. I. 



exercised over the disposal of property; for, in England, 
land can be entailed, and devised by will, to an unborn 
child. In France, the owner of land has no power to 
prevent his children sharing it equally upon his death. 
Then again, property is held in different ways; a great 
number of individuals forming a company or society may 
be the joint owners of property. Property may be held 
on lease. In Europe, the land is chiefly the property of 
private individuals ; whereas, in India, the bulk of the 
land is owned by the government. It would be impos- 
sible to describe the origin of all the different kinds of 
property, and the rights connected therewith, v/ithout 
writing the history of each country; but although it does 
not pertain to political economy to discuss the origin of 
the laws of inheritance, or of landed tenure, yet the pro- 
duction and distribution of wealth are most materially 
influenced by particular laws of inheritance, and by 
different systems of landed tenure ; -and, therefore, all such 
influences must be most carefully considered in a treatise 
on political economy. 

It has been remarked that the principles which regulate The dis- 
the production of wealth have the character of physical f^U'^l^^g ^"^ 
laws. The distribution of wealth is much more liable to affected by 
be controlled by the human will. As an instance, nature com»e?i^**' 
supplies the materials out of which all wealth must be Hon. 
created; and the kind and amount of the labour which 
must be bestowed upon the raw material when it is con- 
verted into some manufactured commodity depends upon 
the properties of the material. Again, the world has been 
so constituted, that every country possesses land of various 
degrees of fertility; from this circumstance we deduced 
that important law which was explained in the last book, 
and which affirms that the cost of agricultural produce has 
a tendency to increase as the demand for it advances. 



JiB 



Manual of Political Economy. 



Inequali- 
ties of 
wealth 



The production of wealth is, therefore, influenced by 
various physical conditions which are independent of 
human agency ; but the distribution of wealth is, of course, 
entirely subject to human control. Men may regulate the 
distribution of wealth by any rules or principles of their 
own creation ; and it is the appropriate purpose of political 
economy to explain the consequences which must follow 
from the rules which may be adopted, or from the prin- 
ciples which may be brought into action. It is, for instance, 
quite optional with men whether they allow custom or 
competition to regulate the distribution of wealth, but it 
is not optional with them to control the effects which 
follow when a particular custom has been adopted, or 
when competition has regulated a transaction. In England 
competition is far more active than in almost any other 
country, and, therefore, many of the practical conclusions 
of political economy must be somewhat modified before 
they are applied to other countries, where, perhaps, custom 
is far more powerful than competition. In England com- 
petition regulates the rent of land ; but in many parts of 
Italy, according to an invariable custom, metayer rents are 
paid, or, in other words, one-half the produce is given for 
the use of the land. In England, again, the produce of 
the land is shared amongst three classes — the landlords, 
farmers, and labourers; but throughout the greater part of 
the world the produce is shared only amongst two classes, 
the landlords and farmers being combined in one, like 
the ancient freeholders of England; or the farmers and 
labourers are merged into one class, like the miserable 
cottiers of Ireland. On the continent of Europe peasant 
proprietors are very numerous, and in these cases the 
individual owns the land, cultivates it himself, and likewise 
provides the capital. We shall trace with care the conse- 
quences which arise from these various arrangements. 

The greatest inequalities of wealth are sure to follow 
the institution of private property; and the wealthier a 



Preliminary Remarks on Property. 119 

country may be, tlie more striking is the contrast between book it. 
the wealth and the poverty which have throughout the «_f^;4— ' 
history of the world accompanied each other. Various necessarily 
schemes have been propounded with the view of causing -^^^^^^^^^^^^^^ 
the wealth which is produced to be distributed more equi- of private 
tably ; . but if the State confiscated the property of every P^^^^^ ^■ 
individual in England to-morrow, accumulated the whole 
wealth of the country in one great fund, and divided all 
the land equally amongst the inhabitants, there would soon 
again be the same inequalities of wealth which exist at 
the present time. The industrious would soon obtain 
those portions of wealth w^hich were allotted in this national 
distribution to those who were indolent, and deficient in 
industrial capacity. Men, too, are differently endowed by 
nature, and those who possess strength and ability would 
soon become wealthy, and those who were less strong and 
less able would quickly return to comparative poverty. If, 
therefore, private property is permitted, and if men can 
indisputably claim as their own the wealth which is dis- 
tributed to them as the reward of their labour, there must 
result great inequalities of w^ealth. And these inequalities 
will be increased if the rights of private property are 
extended, for in England not only is the property of an 
individual secured to him while he is living, but the law 
interprets with the greatest care his wishes with regard to 
the disposal of his property after death. An influence is 
no doubt thus exerted to accumulate large amounts of 
w^ealth in a few hands. Many of the great estates of the 
English aristocracy would long since have been sold and 
distributed amongst different owners had there been no 
power of entail. 

Benevolent men, deeply impressed with the wide-spread Sdmnes to 
poverty which prevails even in the most wealthy countries, ^^g^fj^l . 
have rightly perceived that such great inequalities of wealth commun- 
must always exist if the privileges of private property are ^^"'" 
freely permitted; and, consequently, philanthropists have 



120 Manual of Political Economy, 

BOOK IT. been frequently prompted to advocate schemes of social life 
« — J_/ in which private property shall not exists but all the wealth 
of the community shall be enjoyed in common. This in 
the fundamental idea which hag suo^o^ested communism. 
No philanthropists have ever been more unpopular than 
the communists ; but the antipathy is no doubt due to the 
popular error that a communist is anxious to limit the 
rights of private property by means of a wholesale confis- 
cation. Such a charge, however, is extremely unjust. 
When communism has been attempted, the property upon 
wdiich the experiment has been made has been fairly and 
legitimately obtained. The communists may have been 
n:iistaken theorists, but let us not deal harshly with them. 
They have often made noble sacrifices in order to battle 
against great defects in the state of society ; they have 
sometimes effected gi'eat practical good, and the experi- 
ments made, even when they have been unsuccessful, are 
always w^orthy of attentive reflection. 
Schemes Communism, as first propounded by Owen and Fourier, 

^Owm^and P^^P^^^ed that a society living together should share all the 
Fourier, wealth that w^as produced. A number of families would, 
according to this scheme, live together on the same terms 
as the individual members of a single family. When a 
family settles in the backwoods of Canada, each member 
of the family labours on that work to which he or she may 
be best suited. In such a case the labour of each renders 
some assistance to all the rest, and then the results of the 
labour of the whole family are shared in common. Such 
a society, however, can only be kept together by the strong 
ties of family affection ; and it is manifestly impracticable 
to maintain a similar union between several distinct fami- 
lies. Although the difficulties which oppose communism 
may be patent to all, yet it is well to consider some of the 
evils which communism seeks to remedy. In a state of 
society like our own, established on the basis of private 
property, everything tends to heighten the disadvantages 



Freliminary Remarhs on Frofevty. 121 

which result from comparative defects in natural endow- book ii. 

ments. The strong and able are permitted through life to ; ' ^ 

appropriate to themselves all the fruits of their own labour, 
and the weak and less able are constantly, as it were, borne 
down in the struggle. But in order to remedy these evils 
by any form of communism, an amount of virtue is re- 
quired which is rarely possessed at the present time. The 
utmost self-denial and the widest charity will also be 
needed ; in fact, men must become a higher order of beings 
before they vfill work through life, not for the benefit of 
themselves, but for the purpose of contributing their labour 
to the advantage of the community to which they belong. 
Some of the practical difficulties, however, here suggested Difficulties 
were partly obviated in two systems of modified communism g'^^g'^^J,, 
which were propounded with great ability by St. Simon 
and Fourier, who both proposed that the enjoyment of 
private property should not be altogether forbidden. 

St. Simon's scheme was specially intended to provide St. Simon's 
some machinery for the arrangement of the labour in ^^avoilhui 
communistic society, for without some such arrangement ^^^^se diffi- 
all would be in confusion ; there would be no security that ^^ 
individuals would be employed on the labour for which 
they were best adapted, and every one would be anxious 
to avoid all disagreeable work. St. Simon, therefore, pro- 
posed that chiefs of the community should be appointed, 
who should equitably distribute the labour which had to 
be performed, and should also determine who were to be 
ordinary labourers, and who were to be skilled artisans. 
These chiefs, too, not only distributed the labour, but also 
distributed the results of the labour; they allotted to each 
individual the share of the wealth to which they consi- 
dered he was fairly entitled ; and the share which an indi- 
vidual thus obtained he was permitted to enjoy as his own 
private property. But nothing can be more impracticable 
than this scheme, unless there should happen to be such a 
marked distinction betAveen the individual members of the 



122 



Manual of Political Economy. 



Fourier s 
scheme. 



community and its cliiefs that the right of the chiefs to 
dictate and to govern could not be disputed. The Jesuit 
missionaries established such a community with great 
success in Paraguay; but between these missionaries and 
the community they controlled, there was always the dif- 
ference which distinguishes civilisation from barbarism. 
But no body of men would ever consent to delegate to any 
of their fellow-countrymen the powers which should en- 
tirely subjugate their own individuality; and St. Simon- 
ism, even if it alleviated poverty, would introduce greater 
evils; for a man would be in a pitiable state of subjection 
if he was not himself free to choose the labour upon which 
he should employ his energy. 

The scheme proposed by Fourier was much more skil- 
fully designed; he intended that each separate community 
should consist of about 2,000 persons, who should be 
settled on a square league of ground; he not only permit- 
ted private property, but allowed property to be obtained 
by inheritance. Every member of this community would 
receive a certain remuneration, even if he were not able 
to work. Fourier also recognised the claim of capital to 
be rewarded ; the community were combined like a trading 
company to produce wealth, and after a certain competence, 
considered necessary to support life, had been allotted to 
every individual, th'e remaining produce was divided as a 
reward for labour, capital, and talent. The administration 
of this division of the produce was arranged by the heads 
of the community according to the following plan : — The 
labourers were divided into three distinct grades, which 
marked different standards of skill and talent, and the 
remuneration received by each of these grades varied 
according to a fixed proportion. The particular grade to 
which a workman was admitted, was determined by the vote 
of his fello w- workmen ; there was community of labour, 
but not community of living; it was only proposed, for 
the sake of economy, that each family should have its 



FreUminary Remarks on Property, 123 

separate apartments in the same block of buildings. The book n. 
first objection that will probably be made to this scheme is . ^^; ^' . 
the following : that very soon the industry of a community 
would be destroyed by its members regarding exertion as 
unnecessary, if a livelihood was always ensured to those 
who even did not work. But exactly the same objection 
may be brought against our poor-law system, and yet the 
poor-laws, whatever may be the other evils connected with 
them, cannot be said seriously to impede the industry of 
the country. Internal dissensions would be the greatest Its chief 
difficulty against which the scheme of Fourier would have ^-^^^ ^''^^' 
to contend ; men would be dissatisfied with the grade in 
which they were placed, and the chiefs of a community 
would occupy a position most difficult to maintain, for a 
man is most jealous of any interference with the details of 
his daily life. Again, if such a community were pros- 
perous, and if wealth were more equally distributed than 
in the present state of society, all the members of the 
community would be sufficiently well off to marry at an 
early age ; the result would be, a rapid increase of popu- 
lation ; the land possessed by the community would soon 
become not sufficient to supply the increased population 
with food ; food would become much more expensive, and 
there would soon arise poverty and distress. We believe 
that all such schemes of communism must entirely fail if, 
in a country like our own, they attempt to displace a 
state of society based on private property. It is, how- 
ever, advisable to allude to the principal communistic 
schemes, because, at different times, they have excited great 
interest, and the speculations of those who propounded 
those schemes are often deserving of much careful atten- 
tion. We have pointed out the difficulties which we 
believe will oppose the success of communism, but we 
have not done this in a feeling of harsh antaofonism. A 
communistic experiment may be made without inflicting 
the slightest loss or injury upon any but those who volun- 



124 Manual of Political Economy. 

BOOK ir. tarily take part in it. It is quite possible that sucli an 
experiment would dispel many of those objections which 
beforehand appear most formidable. We ought then to 
welcome, and not to oppose, such an experiment, for com- 
munism has always been mainly prompted by a desire to 
alleviate the poverty which presses so heavily upon a large 
portion of mankind, and there is no nobler work to be 
achieved. A political economist, however, ought not to 
indulge his fancy with untried and perhaps visionary 
schemes of social amelioration ; it is his business to point 
out how the lot of mankind may be improved without 
proposing any fundamental change in the conditions upon 
which the present state of society is based. 



12 




CHAPTER II. 

THE CLASSES AMONGST WHOM WEALTH IS DISTRIBUTED. 



'E liave described the requisites of production to be book it. 
three: land, labour, and capital. Since, therefore, v_^^;J^ 
land, labour, and capital are essential to the production of The classes 
wealth, it is natural to suppose that the wealth which is ^^^ngst 
produced ought to be possessed by those who own the loealth is 
land, labour, and capital which have respectively contri- ^*si7i6wferf. 
buted to its production. The share of wealth which is thus Their 
allotted to the possessor of the land is termed rent ; the ^^«**^s a^c 

■•• , ' termed 

portion allotted to the labourer is termed wages, and the rent, wages, 
remuneration of the capital is termed profit. The remu- "*^^ profits. 
neration therefore received in the form of rent, wages, and 
profits represents the three distinct claims which individuals 
may have for any wealth which is produced. Having 
pointed out that wealth is distributed between rent, wages, 
and profits, we must proceed to determine the laws which 
regulate the comparative amount of rent, wages, and 
profits. In different countries these relative amounts vary 
greatly; for instance, rents are much higher in England 
than in Australia, and wages are much lower in the one 
country than in the other. The rate of profit is also much 
greater in Australia than in England. In Australia, ten 
per cent, may be obtained on the security of a freehold 
mortgage, whereas in England a similar investment will 
not yield more than 5 per cent. Without, therefore, en- 
quiring whether Australia is more productive of wealth 
than England, it is very important to provide principles 
which will explain why wealth is so very differently dis- 



126 



Manual of Political Economy. 



These 
shares are 
not always 
payable to 
different in- 
dividuals. 



tributed in the two countries. Other countries present 
equally striking points of difference, which will require 
careful explanation. It will frequently happen not only 
that there will be those differences which we have just 
pointed out in the comparative amounts of rent, wages, 
and profits, but there may also be differences depending 
on the productiveness of various countries. Thus a certain 
amount of labour and capital applied to a certain tract of 
land will raise more wealth in one country than in another, 
on account of the efficiency of the agents of production ; 
if this were so, rent, wages, and profits might be all higher 
in the one country than in the other; but even if two 
countries were in this position, it might still appear, on a 
comparison of the two countries, that there were consider- 
able variations in the relative amounts of these portions 
into which the wealth is distributed. For instance, the 
rents in the one country might exceed those obtained in 
the other in a greater ratio than the excess of the wages in 
one country over those of the other. 

We have shown that wealth is distributed in three 
shares, namely, rent, wages, and profits: because land, 
labour, and capital are essential to the production of 
wealth; and rent, wages, and profits represent the service 
which has been rendered by each of these agents of pro- 
duction. It must not be supposed that rent, wages, and 
profits are always received by distinct individuals. In 
England, as a general rule, there are these three distinct 
classes of recipients, who are respectively named land- 
lords, labourers, and employers. The landlord seldom 
supplies either capital or labour; the capital is advanced 
by the employer; and the labourer has very rarely any 
capital invested in the industry upon which he may be 
employed. But the economical condition of England 
differs, in this respect, more widely from other countries 
than is usually supposed ; in fact, it is rather the exception 
than the rule, that wealth should be distributed in the form 



Classes amongst whom Wealth is distributed. 127 

of rent, wages, and profits, amongst distinct and separate ^^ok ii. 

classes of individuals. In the south of France, in Italy, in ^ ^— ^ 

Flanders, and in other parts of the continent, peasant pro- Thcpeamnt 
prietors occupy a great portion of the land. It is intended ^JellivesZll 
to signify, by a peasant proprietor, a man who cultivates a the three 
small quantity of land which is his own property ; he him- IhTproduce 
self supplies all the labour and capital which are required, of Ms land. 
In such a case, the produce is not distributed into rent, 
wages, and profits, for one individual is entitled to all the 
produce which is raised, since he owns the land, and has 
also contributed the labour and capital. Although the 
whole produce is as it were heaped together, without being 
divided into three portions corresponding to rent, wages, 
and profits, yet the remuneration obtained by the peasant 
proprietor is composed of three distinct parts. These are 
combined, but they may be separately estimated in the 
following manner. If the land cultivated by the peasant 
proprietor was not his own property, he would be obliged 
to pay a certain rent for its use. A portion of the 
produce, therefore, equal in value to the amount which will 
be thus paid represents the rent. Again, if the capital 
employed by thepeasant proprietor was borrowed from 
some one else, a payment must be made for the loan, and 
therefore a portion of the produce equal in value to such a 
payment indicates the profit, which is a fair remuneration 
for the capital which the peasant proprietor employs. 
Again, the portion of the produce which represents wages 
may be ascertained by estimating the wages which would 
have to be paid if the peasant proprietor, instead of 
working himself, cultivated his land with hired labour. 
Such an estimate as that we have just indicated is often 
of gi'eat practical importance. The comparative advan- 
tages and disadvantages of farming by peasant proprietors 
have long been keenly disputed. In order to decide this 
important question, we must pursue the following method. 
From the whole produce which is raised upon the land 



128 



BOOK rr. 

CH. II. 



Cases of 
India and 
of slave- 
owning 
countries. 



Mann- 

fa'^turhig 

industry. 



Manual of Poliiical Economy. 

cultivated by a peasant proprietor, there must in tlie first 
place be deducted an amount wliicli represents the rent 
this land would pay ; there must also be deducted a 
certain amount for labour and capital, and if a surplus 
remains, it will represent the advantage of farming by 
peasant proprietors. We shall, in another chapter, have 
occasion to enlarge on this subject. 

A great portion of the land of India is occupied, not by 
peasant proprietors, but by peasant cultivators. The land 
is generally owned by the government. The peasant cul- 
tivators often rent from the government a small portion of 
land, which they can cultivate with their own labour and 
capital. Sometimes the government grants the land at a 
fixed rental to individuals who occupy the position of 
middle-men, and who re-let the land to peasant cultivators. 
Land which is cultivated by slaves is in an anomalous 
position, for in this case it would appear that the whole 
produce is shared between rent and capital, since the 
slaves must be regarded as a portion of the slave-owner's 
capital, just in the same manner as the horses which plough 
our own soil are a portion of an English farmer's capital. 
The slaves do not receive any wages ; they cannot accumu- 
late wealth ; they have none of the rights of property. 
The slaves are fed, it is true ; but so are the horses fed. 
The economical condition of a slave country differs so much 
from other countries that we must discuss some of the 
economical aspects of slavery in a separate chapter. 

The reader may remark that in the general observations 
made in this chapter on the distribution of wealth we have 
only considered agricultural produce. We have done this 
because similar although somewhat more complicated laws 
regulate the distribution of the wealth which is created by 
manufacturing industry. All the materials upon which 
manufacturing industry is employed are products obtained 
from the land. Thus, wool is an article of agricultural 
produce. When wool is woven into cloth, it is, of course^ 



Classes amongst ivliom Wealth is distributed. 129 

rendered much more valuable. How, then, is this wealth book ir. 

distributed which is added to the wool by manufacturing ■ \.-^-^ 

it into cloth? Wool, and such other raw materials of 
manufacturing industry, are purchased by the manufac- 
turer, and become a portion of his capital, and the wealth 
produced by manufacturing industry is finally distributed 
between capital and labour; in fact, as it were, there are 
two distributions. The raw produce, or, more correctly, 
the money, with which the m.anufacturer purchases this 
raw produce, is distributed in a similar manner to other 
agricultural produce; after this raw material has been 
manufactured, another distribution takes place between 
the labour and the capital which have been employed in 
the production of the manufactured commodities. 

When it is stated that wealth is distributed in the form Remunera- 
of rent, wages, and profits, it must not be supposed that f^J^' ^^^ ^^ 
the labour which has directly contributed to the production when in- 
of the wealth is alone remunerated. Before agricultural ^"'^^'^^^. 

. ^ . ^ ^ proaucUve, 

produce is brought to the market, the industry of many 

other labourers may have been called in besides those vvho 

axe actually working on the farm, all of whom will receive 

a certain share of the produce in the form of wages. A 

farmer may employ bargemen to take his wheat by canal 

to a particular market, but these bargemen must be paid 

Yfages, just in the same way as labourers who are actually 

employed on the farm. Again, a farmer may join with 

others to pay labourers for keeping the roads in a proper 

state of repair; from him, also, are levied rates which 

maintain a police establishment, considered necessary to 

make property secure. We shall hereafter enquire on 

whom these burdens fall. 

We have now described at sufficient length the classes Relative 

amongst whom wealth is distributed. The amount which ^^P^^*'^^^(^^ 

' 1 1 1 n 1 of compe- 

m any particular case the landlord, capitalist, or labourer tition and 
receives is regulated either by competition or by custom. ^^^^^"^• 
In almost every case competition and custom exercise a 



I.'^^O 



Manual of Political Economy. 



BOOK II. joint influence; but competition not unfrequently acts so 
. ^^•^^^- . mucli more powerfully than custom, that it may be accu- 



rately regarded as the sole determining cause. A parti- 
cular custom, however, not unfrequently is strictly adhered 
to. We cannot remark upon every petty custom which 
may influence some small trades, but we shall with great 
care trace the effects of customs more wide and constant 
in their operation, such, for instance, as those which regu- 
late the rent of land. The metayer rents which exist in 
many continental countries may be quoted as an example 
of one of these customs ; for where this tenure prevails the 
rents paid for the use of the land are always equivalent to 
a fixed portion of the produce. This portion, as the name 
metayer implies, is generally one-half. 

It may however be remarked, that as a nation advances 
in industrial enterprise all her commercial transactions are 
Beneficial more completely regulated by competition. There cannot 
effects of \^Q activity of trade without a keen desire for gain ; but 
such a feeling indicates the spirit of competition, for in 
business men compete with each other with the view of 
securing the greatest possible gain. It is, however, im- 
portant to present competition in a somewhat different 
aspect; for the manner in which we have described it may 
very possibly encourage the wide-spread error that with 
it there is associated something almost criminal. Many 
who profess to be social philosophers attach to competition 
the stigma of selfish greed. The poverty of the poor is 
often attributesd to .it ; but we shall have reason to show 
upon the that it is no enemy to the working-classes. Without 
labouring j-j^^ their poverty would be rendered doubly severe; for it 
is an active spirit of competition which maintains the 
capital from which the wages of the labourers are paid. 
Competition befriends the working-classes in other respects ; 
it cheapens commodities, and ensures that the maximum 
of wages shall always be paid. Competition is not con- 
fined to one class; it may be as rife amongst buyers as 



Classes amongst wJiom Wealth is distributed. 131 

amongst sellers, or amongst tlie employers as amongst tlie book ii. 
employed. Individuals who have goods to sell are anxious -- — ^v— ^ 
to realise as large profits as possible ; but when there is 
competition, a trader cannot be paid more than what is 
termed a fair price for his goods, because if he attempts to 
obtain more than the ordinary price he will be undersold 
by other traders. When buyers compete with each other 
they are anxious to secure the greatest gains, or, in other 
words, to buy upon the best possible terms ; and thus, 
when buyers are each intent on purchasing on the most 
favourable terms, a commodity is sure to realise what it is 
worth. It therefore follows that if on the one hand com- 
petition prevents a trader obtaining exceptionally high 
profits; on the other hand, it ensures to him a fair price 
for his goods. Some, perhaps, may think it unfortunate 
that employers, stimulated with a desire to realise the 
largest gains, should seek to engage their labourers on the 
lowest possible terms. But such conduct on the part of 
the employers inflicts no injury upon the labourers; for 
whenever there is activity of competition, an individual 
manufacturer or trader is as powerless to get labourers to 
work for him at less than the ordinary wages as he would 
be to buy cotton at a cheaper rate than his fellow- 
manufacturers. The price of cotton is maintained because 
there are those who are anxious to purchase it; the rate 
of wages is also maintained by those who are anxious to 
purchase labour. Competition, consequently, exerts no 
tendency to reduce profits or wages ; the tendency is rather 
one of equalisation. 

The influence w^hich would be produced by free compe- Compe- 
tition is often much interfered with by other motives which i^^^^o^^'^^*^* 
may be regarded as antagonistic. The whole spirit of wi (liferent 
English life is so entirely commercial that we experience ^^'-^"^^*^- 
a difficulty in imagining a people so apathetic to gain 
that they will not disturb themselves even in the slightest 
degree in order to realise a pecuniary advantage. It is, 

k2 



132 Manual of Political Economy. 

BOOK II. however, well known that many retail traders in the less 

CH TT 

^ — \-~^ frequented towns of Germany seem almost careless about 
the profits they obtain. But, to an Englishman, making 
money is one of the most absorbing thoughts of life. A 
large fortune has no such irresistible charms for a German ; 
his great object is to pass through life with as little exer- 
tion as possible. 

It has been often remarked that all men are more or 
less the slaves of habit. Every nation has some customs 
which become, as it v/ere, engrafted on its existence ; cus- 
toms which in their origin were perhaps purely social have 
in many cases, after a certain lapse of time, produced effects 
. of great pecuniary consequence. A custom has sometimes 
gradually assumed the authority of a law, and been made 
to control the rents which are paid, the profits realised, and 
the wages received ; in this way the consequences which 
would result if competition freely operated are often inter- 
fered with : for men not unfrequently pay the most implicit 
obedience to a custom, even when they are not bound to 
Effects of do SO by law. It has a^lready been stated that, in parts of 
case of rent ^^^® Continent, the landlord uniformly receives as a rent 
one-half the produce of the land ; he never thinks of asking 
more or less, although his land might very likely yield 
him a larger income if it was let to the tenant who might 
consent to pay the highest rent for it. In many professions 
the charges made are absolutely fixed by custom. Lawyers 
and physicians do not adjust their charges like ordinary 
traders; the charges are regulated by the custom of the 
profession. Equally rigid customs affect many classes of 
labourers ; artisans in particular trades must serve a fixed 
term of apprenticeship, and the wages received are often 
determined by customs which, though perhaps not so' 
rigidly observed as some others, yet are frequently not 
easily modified. 

Having, therefore, shown that the distribution of wealth 
may be primarily classified into rent, wages, and profits, we 



Classes amongst ivhom Wealth is distributed. 

shall, in the first place, explain how the amount which is 
received in the form of rent, wages, and profits is deter- 
mined when regulated by competition; and we shall then, 
secondly, proceed to explain the different results which 
follow, when the distribution of wealth is affected by such 
customs as those we have just indicated. 



T '^ O 



134 




CHAPTER III. 

EENTS AS DETERMINED BY COMPETITIOIS'. 



F we attempted fully to describe the origin of property in 
. land, we should have to write a general history. Every 
^igZ'of ^^^^*^y ^^s probably been subjugated, and grants of the 
reitt. vanquished territory were the ordinary rewards which the 

conquering chief bestowed upon his more distinguished 
followers. Many noble families in this country still retain 
the lands which their ancestors received from William the 
Conqueror. Lands obtained by force had to be defended 
by force ; and before law had asserted her supremacy and 
property was made secure, no baron was able to retain his 
possessions unless those who lived on his estates were pre- 
pared to defend them. There thus arose almost univer- 
sally some personal relations between landlord and tenant, 
and the personal services which such a feudal tenure 
required formed a considerable part of the rent which was 
paid for the land. As property became secure, and every 
landlord felt that the power of the State would protect him 
in all the rights of property, every vestige of these feudal 
tenures was abohshed, and the relation between landlord 
and tenant has thus become purely commercial. A land- 
lord offers his land to anyone who is willing to take it ; he 
is, of course, anxious to receive the highest rent he can ; 
and he obtains that rent which the tenant who takes it 
may think the land is worth. What are the principles 
which regulate the rents which may thus be paid ? 
How h the W^e all know that the more fertile land is, the higher 
lent of a ^^-^^l be its rent We are also aware that the rent which 



ilents as detevhucnea by Competition, 135 

land yields not only depends upon fertility of soil, but book 11. 
also upon convenience of situation. Land which is remote . ch- ^ i"- ^ 
from towns does not pay so high a rent as land of equal given tract 
fertility situated at a short distance from some lars^e centre ^f ^^1^^ ^^^' 
of population. The relative rents, therefore, which are 
paid for different farms are determined by fertility of soil 
and by convenience of situation. It will be generally 
admitted that the value of land depends upon the two 
causes we have just mentioned, but the important question 
to answer is this : Can we obtain an index to the amount 
of rent which land can afford to pay at any particular 
time? The object we have in view in the present chapter 
is to supply an answer to this question. 

In every country there is the greatest variety in the Short stau- 
fertility of the soil; high rents are paid for the use of some ^^'^^/f^^^' 

•^ >^ 5 & r carclo s 

land, whereas other land not far distant may be too poor theory of 
to be cultivated. Let it be supposed that there are two ^'^"^" 
farms which are rented at different rates ; the one farm is 
rented more highly than the other because its soil is more 
fertile or its situation more convenient, and the difference 
in the rents paid by these two farms would indicate the 
pecuniary value of the superior fertility or of the more 
advantageous situation. There may be another tract of 
land so poor that, if cultivated at all, it could only bear 
a nominal rent ; for land will only pay a nominal rent when 
the produce raised from it is no more than sufficient to 
return the average rate of profit upon the capital spent 
in its cultivation. If we compare such barren land with 
land which pays a considerable rent, then, as we have just 
before remarked, the difference in the pecuniary value of 
the superior fertility and the other advantages possessed 
by this better land may be measured by the difference in 
the rents paid by the good and barren land respectively. 
But this difference is denoted by the whole rent paid by 
the good land, since the rent of the poor land is assumed 
to be merely nominal ; or, expressing this in other words, it 




Manual of Political Economy. 

may be stated, that the rent of land represents the pecu- 
niary value of the advantages which such land possesses 
over the worst land in cultivation, the rent which this 
worse land yields being merely nominal in amount. 

The proposition Avhich has just been enunciated, and the 
simple reasoning by which it has been established, may be 
regarded as a statement and a proof of E-icardo's celebrated 
theory of rent. The theory, as we have here expounded 
it, may perhaps appear so simple, nay, perhaps, so obvious, 
that our readers will not readily appreciate its importance, 
nor will they perhaps believe that the theory itself has 
been warmly controverted by eminent men. It will be 
advisable to consider the ordinary objections urged against 
the theory, for we shall be able thus still farther to elucidate 
it, and these objections will afford an appropriate example 
of the popular prejudice which so frequently attempts to 
Dr. Wke- discredit the conclusions of science. The most recent re- 
loelVs oh- YiYsl of attacks on Ricardo's theory may be found in some 

jecUons to " '^ 

this theory; prefatory remarks by Dr. Whewell, prefixed to a 'Collection 

of Some Fragmentary Tracts on Political Economy, by the 

late Mr. Jones.' Dr. Whewell objects to Ricardo's theory 

because the rent of land is, over the greater portion of the 

v/orld, controlled by custom; and even in England, where 

land is let by competition, Dr. Whewell maintains that this 

theory is never employed to settle the rents that should 

be paid ; he therefore makes two specific allegations : his 

first position is, that the theory is of comparatively little 

that it is value because of its limited application, and, secondly, that 

''■piicahle^' '^^ ^^^ ^^ of no practical importance even in the excep- 

and that tional cases where it may be regarded as capable of a prac- 

ZucctbiTit ^^^^ application. In this chapter we shall confine our 

is unim- attention to the last of these allegations ; the modifications 

]por an . ^yj-j^^^j^ j^q theory requires, when rents are fixed by custom 

and not by competition, will be considered in another 

chapter. Now no one can reasonably suppose that Ricardo, 

or any of those who adopt this theory, imagine that a land 



Rents as deiermined hy Competition, 137 

steward avails himself of this theory when he is fxxing the book n. 
rent of any particular land. No farmer when about to rent v_^^^;J!^ 
a farm asks himself, What is the value of this farm above ^/^g ^^^^ 
the worst land in cultivation? But these considerations do objection 
not afford any valid objections against the theory; it might 
as ■well be said that the law^s of digestion and respiration 
are not worth explaining, because no one thinks of these 
laws when he ea^ts or breathes. Although men of business 
do not use a theory of rent, and may have never heard the 
name of such a theory, yet unconsciously they follow the 
theorj^; and the theory will explain the practical conse- 
quences connected with the renting of land, as completely 
as if all who were engaged in such business transactions 
were political economists of the true Ricardian type. The 
point, therefore, to be determined is not whether the theory * 

is used, but whether the theory is universally true when 
rents are determined by competition. Let us again ex- Restate- 
pound the theory; and we think it will be admitted that J^g^^^^j;^ 
each of the positions which it assumes is incontrovertible. 
It cannot be denied that the land of each country varies 
so greatly in fertility, and possesses such various advan- 
tages of situation, that there always exists some land which 
is either so barren or so disadvantageously situated that 
it is just on the margin of cultivation, and can only pay a 
nominal rent. Land which is more fertile or better culti- 
vated will pay a rent, and such rent must represent the 
difference in the value between this better land and that 
land which is so barren that it can only pay a nominal 
rent. But this value is represented by the difference in 
the nett produce obtained from the two lands in question, 
and hence the rent of any particular land may be esti- 
mated as the difference between the amount which it pro- 
duces and the amount of produce raised from the worst 
land in cultivation. This is the ordinary enunciation of 
Bicardo's theory ; the terms however in which this enun- 
ciation is expressed require some explanation. In the first 



^3^ Manual of Political Economy, 

BOOK II. place, it should be remarked that nett produce, not otoss 

CH. III. J • . 1 > & 

> , ' produce, is meant. 

Illustration The necessity of making this distinction may be illus- 
teX ^ ^^^'^^^^ ^y an example— for let us suppose that there are 
anexample. two farmers, A and B, and that one of these, A, occupies a 
much more productive farm than the other, B. Now the 
gross produce of a farm is the whole produce which is raised 
from it, without deducting the expenses of cultivation. 
But the surplus produce which remains to the farmer can- 
not be ascertained until from this gross produce is deduct- 
ed all the expenses connected with the farm. A certain 
sum must also be deducted as interest for the capital in- 
vested in the farm, and the farmer should also estimate 
his own labour of superintendence at a certain pecuniary 
amount. All these deductions may be regarded as forming 
in the aggregate the cost of cultivation; and when such 
deductions have been made, the produce which remains is 
the nett produce, or, in other words, the nett produce is 
obtained by deducting the cost of raising the produce fron* 
the pecuniary value of this produce. If, therefore, it were 
ascertained that the nett produce of As farm exceeded by 
1,000Z. the nett produce of B's farm, it is manifest that A 
would be able to pay 1,000^. more rent than B. If B's farm 
was so poor that he obtained it at a merely nominal 
rent, the amount of its nett produce would be also 
nominal. But it may be said, If such were the case, B 
would not continue to cultivate the farm; this, however, 
need not be so, because it has been supposed that the nett 
produce is that which remains, after every expense con- 
nected with the farm has been paid, and after an adequate 
remuneration has been given to the farmer for his own 
labour and for the use of his capital; therefore, it would 
answer B's purpose to cultivate his farm, although the nett 
produce was merely nominal, if he could obtain the farm 
at a nominal rent. But, since we have supposed that the 
nett produce of As farm exceeds by 1,000^. the nett pro- 



Rents as determined hy Competition. 139 



duce of B's farm, A would be able to pay this 1,000?. as book n. 

rent, and, therefore, the rent of any land is the difference « '^ — 1^ 

between its nett produce and the nett produce of land which The tkeo- 
pays a merely nominal rent. Moreover, we shall proceed ^^^^^ ^q^-^.* 
to show that this amount of rent, namely 1,000?., which ddes with 
from theoretical considerations we have proved that A is ^-(^^^ result, 
able to pay, will be approximately the rent which is actually assuming 
paid if land is let by open competition. Now, experience competi- 
proves that men are satisfied to continue in business if «'ow. 
they can realise the current rate of profit upon their 
capital, and also obtain a certain remuneration for their 
own risk and trouble. Let it be supposed that As land- 
lord demands from him a rent of 1,000?. — this sum repre- 
senting in value the nett produce of the farm — the profits 
he obtained upon his farm would still be sufficient to 
induce him to continue his business. If, however, he were 
called upon to pay a greater rent than this, say 1,500?. 
a-year, his profits would be so diminished that he would 
not be able to obtain the same return for his capital as if it 
were invested in some other business. He would virtually 
lose by farming, because he could make more of his money 
if otherwise invested ; and no class of traders will continue 
a business when it becomes comparatively unremunerative. 
The landlord would therefore be powerless to obtain from 
A a rent much exceeding 1,000?. But there is a further 
question: What would prevent the farmer paying a less 
rent than 1,000?., say a rent of 700?.? This would certainly 
be prevented by the competition of others anxious to 
engage in farming operations. Those who had a practical 
knowledo^e of farmino^ would be able to calculate with con- 
siderable exactness what would be the nett produce on As 
farm, and they would thus knov/ that if A was only paying 
a rent of 700?. a-year, that he was paying 300?. a-year less 
than might be paid, with a realisation of a fair profit to the 
farmer. Others would come forward and offer a higher 
rent for the farm, and A would consequently be obliged to 
leave the farm or else pay a higher rent. 



/ . 



140 



Manual of Political Economy, 



Illusfra- 
tion from 
astronomy. 



The 'Mar 
gin of cul- 
tivation.* 



It is, tlierefore, no exaggeration to say that when land is 
freely competed for, rents are very approximately adjusted, 
according to Ricardo's theory. We say "approximately," 
because there is a certain margin of variation for which 
allowance ought always to be made. Thus, two land- 
agents may differently value the nett produce of a farm. 
A landlord, rather than lose an old tenant, may very often 
continue to receive less rent from him than a new tenant 
would be wilhng to pay; but in such a case competition is 
to a certain extent interfered with by the feelings which 
arise from affection and old association. Ricardo's theory 
is strictly true upon the supposition that there is free 
competition, and in practical life the results which may be 
deduced from the theory really occur in proportion to the 
extent to which competition acts without interference from 
other disturbing agencies. It is no uncommon thing to say 
that the sun causes the earth to revolve in an ellipse, and 
yet the earth never does so move, it oscillates from one 
side to the other of this ellipse in consequence of the dis- 
turbing force of each planet's attraction. For many of the 
practical purposes of astronomy, it may be stated with suf- 
ficient exactness that the orbit of the earth is a true ellipse ; 
and just in a similar way, in a country such as England, 
competition is so much more powerful than any of the 
other ^ motives which influence the adjustment of rents, 
that it will be sufficiently exact to affirm that the rents 
which are actually paid are those which would be deduced 
from Eicardo's theory. In some cases, however, other 
motives which may be regarded as antagonistic to free 
competition, assume so much importance that they must 
be specially considered. 

It will much assist clearness of conception, if we employ 
some technical language to describe the terms of Eicardo's 
theory. This theory implies that in any given condition 
of a country there is some land which will just pay for 
cultivation if it is let at a nominal rent. Thus, as it were, 
a margin of cultivation is marked, below which the cul- 



Rents as determined hy Competition. 141 

tivation of land cannot descend, unless some circumstances book ii. 
sliould occur which should either induce men to be satis- ^ — ^,^^- 
iied Y/ith smaller profits, or should increase the productive- 
ness of land; it must be borne in mind that there are two 
ways in which the productiveness of land may be increased ; 
in the first place, a larger demand for agricultural produce 
may raise its value, and in the second place, agricultural 
improvements may cause a greater amount of produce to 
be obtained from the soil. In the example which we have 
employed, it has been supposed that this margin of culti- 
vation has been denoted by the farm occupied by B; for 
the produce "svhich is raised from this farm only suffices 
to pay the expenses of cultivation, and to return B a 
fair remuneration for his capital and for his personal 
exertions. Under these conditions this land will pay no 
rent. Various circumstances, however, may occur which 
will enable rent to be obtained from this land, or, in 
other words, would cause the margin of cultivation to 
descend. Let us, therefore, enquire into some of these 
circumstances. 

It has already been remarked that the current Td^iQ^ oi The margin 
profit which prevails in different countries varies greatly. %oncU,^' 
In Australia ten per cent, can readily be obtained on the pends upon 
security of a freehold mortgage, and a merchant in ^^^^t profit in 
country would not think of incurring the risk and trouble ^^^^^ 
of investing his capital in trade, unless he could make a 
much larger profit than ten per cent., because he could 
secure this profit without risk or trouble upon a freehold 
mortgage; therefore, traders in that country would not 
continue their business unless their profits were very much 
more than ten per cent. But in England five per cent, can 
scarcely be obtained on a freehold mortgage, and a trader 
would be perfectly satisfied with his business if a profit of 
ten per cent, were realised on the capital invested in it. 
We shall hereafter enquire into the causes which produce 
these great variations in the rate of profit in different 



142 



Case of 
A ustralia. 



Mamtal of Political Economy. 

countries. In Holland a still lower rate of profit prevails 
than in England. Let it be assumed that in this respect 
England became like Holland, and that the English would 
be satisfied with a rate of profit so reduced that they would 
lend money to their government, as the Dutch have done, 
at the small interest of two per cent. If such a change 
occurred, men of business in England would be satisfied 
with a smaller profit than they are now, and would be 
ready to invest their capital in businesses which would 
produce them a lower rate of profit. But such a change 
would at once affect the margin of cultivation. Before 
the change occurred, no worse land is brought under tillage 
than that which is cultivated by B, because, although he 
pays only a nominal rent for his land, yet he cannot do 
more than reaUse a certain profit upon his capital, say a. 
profit of ten per cent. ; and it is assumed that with a less 
profit than this, men of business will not be satisfied. But 
when the change we have supposed has taken place, a 
lower rate of profit will prevail throughout the country, 
and men will now be satisfied with a smaller profit. Hence 
worse land than that which was before cultivated by B, 
would return sufiicient to give that lower rate of profit 
with which men are now supposed to be satisfied. The 
margin of cultivation would therefore descend, the land 
occupied by B would cease to be the worst under culti- 
vation; and this land, instead of paying a nominal rent, 
would now yield a rent which might be estimated by the 
difference between its nett produce and the nett produce of 
the inferior land which has been brought under cultivation 
in consequence of the reduction in the general rate of profit. 
It is, therefore, manifest that such a reduction in the gene- 
ral rate of profit would cause the rent of all land to rise. 
Australia will some day offer a striking example of a rise 
in the rent of land, caused in the manner we have just 
described. The great inequality in the rates of profit, 
current in England and Austraha, cannot long continue; 



Rents as determined hy Competition, 143 



and wlien profits in Australia are reduced to what they are book it. 
in England, a vastly increased area of land will be brought ^ ^'^^•^"^- , 
under cultivation in Australia; the margin of cultivation 
will rapidl}^ descend, and the rent of land will be greatly 
increased. 

We will now discuss some of the other causes which may 
affect the rent of land. The productiveness of land has 
already been much increased, and is perhaps destined still R'^nt u 
farther to be increased by improved implements. Confi- "i^prm-ed 
dent predictions have been made by competent persons 'methods of 
that steam cultivation will materially diminish the cost of 
tillage. If this be the case, the nett produce of every farm, 
as we have defined it, will be greatly increased, and, there- 
fore, rents will as a consequence rise from this diminution 
in the expense of cultivation. But when rents rise, the 
margin of cultivation will descend ; for if the cost of 
cultivation is diminished by steam machinery, land may 
be profitably cultivated which before would not pay the 
expenses of tillage. The farmers, therefore, will ultimately 
receive no special advantage from the introduction of 
improvements in the method of cultivation. Temporarily 
they may be benefited ; for those who first avail them- 
selves of the improved machinery may for a long time 
continue to derive an important advantage, because, until 
the machinery has been generally introduced, rents will 
not be raised. Ultimately, however, the whole of the 
advantage will be absorbed by the landlords ; for if the 
expenses of cultivation are diminished, the farmers will be 
able to pay a higher rent, and the competition of capital 
will render it impossible to resist the increase of rent. We 
have purposely said that the landlords, and not the far- 
mers, will derive a special advantage, because, in one 
sense, the farmers, conjointly with every other class in the 
community, will be benefited, since, if the expenses of 
cultivation are diminished, the cost of production is dimi- 
nished, and, therefore, food will be cheapened. The effect 



144 Manual of Political Economy, 

BOOK II. which may be thus produced by cheapening food, at once 
> ^"- "^- , suggests questions of the greatest importance. These, 
however, we must reserve until we treat of exchange, in 
the next division of the subject. 
These con- We will here take the opportunity of remarking that 
elusions ^^Q lisive as yet said nothing about the value of those shares 
/Mr^/L?co"i- iiito which any wealth which is produced may be dis- 
slderation tributed. All such questions with regard to value cannot be 
come to appropriately considered until we treat of exchange. When, 
speaJcof therefore, in this chapter we have alluded to particular 
circumstances which will increase rents, we attribute the m- 
crease not to any rise in the price of agricultural produce, 
but we refer the increased rent entirely to a different distri- 
bution of the produce of the land, more advantageous to 
the landlord. Thus the distribution will be changed in the 
following manner, when the use of improved implements 
diminishes the expense of cultivation : The profits of the 
farmer and the wages of his labourers will remain as they 
were before ; but the landlord will receive, in addition to 
the rent which is previously paid to him, all that is saved 
in the expense of cultivation. It is very important to bear 
this in mind, because a confusion may arise very embar- 
rassing to the reader ; for in popular phraseology rents are 
often said to rise without any alteration in the relative 
amounts received by those classes amongst whom the pro- 
duce of the land may be distributed. If, for example, a 
landlord's rent is a certain portion of the produce of the 
land, then his rent is said to rise if anything sliould occur 
to increase the value of this produce. Before the Tithe 
Commutation Act was passed, the tithe was a rent-charge 
amounting to one-tenth of the produce. If it had not 
been for this commutation, tithes would be considered at 
the present day to be increased by two distinct causes ; for, 
in the first place, since more produce is now obtained from 
the land, the tithe would be increased in quantity ; and, 
secondly, even if the tithe was not increased in quantity, 



Rents as determined hy Competition. 145 

its amount would be increased if there had been an book ii. 
augmentation in the vahie of agricultural produce. But > — ^^ — ^ 
Ave must postpone considering an increase of rent which is 
represented^ not by a larger amount of produce, but by a 
rise in the price of this produce ; for when discussing the 
distribution of wealth we must suppose that rent, profits, 
and wao'es are received in kind. Distribution is concerned 
with the laws which regulate the absolute and relative 
magnitude of those portions into which wealth is dis- 
tributed; and it belongs to the subject of exchange to 
examine the causes which determine the value of an 
individual's share of the profits derived from some indus- 
trial source, such as a farm or manufactory. 

Returning, now, to those causes which affect rents in Causes 
the sense we have just described, it becomes obvious, after /^g^ ^^ ^ 
what we have stated with regard to improved machinery, lower rents. 
that rents must be increased by any circumstance which 
diminishes the expense of cultivation ; and, conversely, 
rents must be diminished, if the expen-ses of cultiva- 
tion should be augmented. Such an augmentation will, 
in all probability, be caused in a few years by a rise in 
the wages of agricultural labourers. Agricultural labour- R^se of 
ers in this country have long been worse paid than any agrlcul- 
other labourers. Each year, however, many influences ^'^'^'^^ ^^- 
are brought more powerfully into operation, which 
will tend to remove such inequalities in the remunera- 
tion of different classes of labourers. Increased education 
will make those employed in agriculture more keenly 
desirous to sell their labour on the best possible terms. 
The rapid extension of our railway system enables labour- 
ers to pass easily from one district to another. Emigration 
has already materially raised the general rate of wages 
throughoat the country; and the influence thus produced 
by emigration is probably destined to be much more strik- 
ingly exhibited. But if labourers receive higher wages, 
or, in other words, an increased share of the aggregate 

L 



146 Manual of Political Economy, 

produce, there will be a smaller remainder left to be dis- 
tributed between rent and profits. If the rise in wages is 
accompanied with no reduction in the general rate of 
profit throughout the country, then rents must suffer. 
This is sure to be the case if the rise in wages is not 
general, but is confined to agricultural labourers, because, 
under such a supposition, nothing would have occurred to 
affect the general rate of profit in other businesses, and, 
therefore, the profits made by farmers cannot continue to 
be exceptionally lower than the profits realised in other 
trades. But the theory of Kicardo supplies a test which 
will indicate how rents are affected by any change in the 
economical condition of the country. This theory defines 
the rent of any particular land to be the difference between 
its produce and the produce of the worst land in culti- 
vation. Therefore, the important thing to ascertain is, 
whether the margin of cultivation has or has not descended. 
If, for instance, the wages of agricultural labourers were 
materially to increase, without any alteration in the value 
of agricultural produce, and without the introduction of 
improved methods of tillage, much of the land which is 
now cultivated would cease to return any profit; the 
margin of cultivation would ascend, and there would be a 
In what general fall in rents. In this sense, therefore, the interest 
sense the ^^ ^-^q landlord is opposed to that of the labourer. Again, 

interests of ^ n t t i 

tJielalourer if the general rate of profit throughout the country was to 
and land' ^- ^-^^ profit realised by farmers would also rise. The 

lord are op- > r ./ • i i i p 

posed to poorest land in cultivation would not yield to the farmer 
each other. ^^^^ increased rate of profit. This worst land, therefore, 
would cease to be cultivated, the margin of cultivation 
would ascend, and in this case, also, the rent of land would 
be reduced. A rise, therefore, in the rate of profit, or in 
the rate of wages, unless accompanied by some counter- 
acting circumstances, will cause rents to decline. Hence, 
it would appear that the interest of the landlord is opposed 
to that of the labourer and the capitalist. This conclusion 



Rents as determined by Competition. 147 

has been the source of much of the opposition expressed book ii. 
towards Kicardo's theory. But it is difficult to understand J^f:J[fL. 
why such a conchision should be regarded as so very per- 
nicious. If the produce of the land is distributed amongst 
rent, wages, and profits, it is obvious that the more there 
is allotted to labour the less there will remain to be appro- 
priated as rent. The opposition of interest intended to be 
expressed by Ricardo, does not imply that the interests of 
any one class are opposed to the general welfare of the 
country, for all the three classes may participate in any 
general improvement. Thus, if an increased quantity of 
produce is obtained from the land, there will be more to be 
distributed, and rents, wages, and profits may be simultane- 
ously increased. The opposition of interests which we have 
spoken of only refers to variations in the relative magnitude 
of those portions or shares into which wealth is distributed. 

The rent of land is, however, far more powerfully ^ow^Aew- 
affected by an increase or decrease of population than by population 
any other circumstances. Within the last twenty years the ^/^^^^ 
population of Great Britain has increased 25 per cent. This 
implies that at least 25 per cent, more food is required. 
Let us for a moment consider what would occur if this 
increased supply of food had been obtained from our own 
soil. In the first place, more land must be brought under 
cultivation; the farmer would be remunerated for culti- 
vating his worse land by a rise in the price of food. The 
margin of cultivation would thus be greatly lowered, the 
rent of all land would therefore be greatly increased, the 
farmers would be able to j)ay these higher rents, because 
the price of agricultural produce had risen. It therefore 
appears that a very considerable rise, both in the rent of 
land and in the price of food, must have inevitably accom- 
panied this increase in our population. The rise in the 
rent of land would, under such circumstances, be assisted 
by two distinct causes : in the first place, rents if received 
in kind would be increased, because the margin of culti- 

L2 



rents. 



148 Manual of Political Economy. 

vation has descended, and the produce thus received as 
rent would have been rendered more valuable in conse- 
quence of the rise in the price of food. But this rise in rent 
and in the price of food has been, to a great extent, pre- 
vented, because a considerable portion of the additional 
food required for the increasing population of this country 
has been supplied by the vast importations of corn which 
have taken place since the removal of protective duties. 
There has, during the last ten years, been an average 
annual importation of 5,000,000 quarters of grain. Al- 
though rents would be far higher than they are now if we 
had been restricted to our own soil for the additional 
supplies of food required, yet if we now travel through the 
country, we observe tracts of highly-cultivated land which 
a few years since were open downs. The whole of Salisbury 
Plain is now covered with comparatively luxuriant crops ; 
but the cultivation of such land affords most unmistakeable 
evidence of the rise in the rent of land which has occurred 
during the last few years. 
Part of the The remarks which have been made in this chapter on 
^aid maybe ^^^^ Subject of rent would seem to indicate that the rent of 
considered any particular soil depends upon its natural fertility. But 
Tamud ^^ ^^® value of land is rarely due entirely to its natural fer- 
tility ; little of the land which is now cultivated would be 
so productive as it is, unless capital had been spent upon 
it. The fens of Lincolnshire and Cambridgeshire were 
once worthless swamps, but drainage has now converted 
these fens into most valuable arable land. In such a case, 
it would appear that the whole rent which is paid is almost 
entirely due to the capital which has been spent on these 
improvements. Hence this important question is sug- 
gested : Ought we to consider as rent the additional price 
which is paid for the use of land when its productiveness 
is increased by an outlay of capital on drainage and other ii 
such improvements? The rent of land whose fertility has 
been artificially created differs in no single respect from 



Rents as determined hy Comjoetition. 149 

the rent of land whose fertility has been chiefly derived book k. 
from unassisted nature; and the amount of rent which is « — '~J1L^ 
jDaid in these two cases is determined by the same causes. 
The farmer who cultivates a reclaimed fen, can afford to 
pay in rent just so much produce as is left to him, after all 
the expenses of his farm have been paid, and he has him- 
self been reimbursed for his own labour and capital. He 
pays rent because he is allowed to cultivate a productive 
soil, and it is a matter of no concern to him whether the 
productiveness of the soil is due to natural or artificial 
causes. A portion of rent, therefore, may generally be 
considered to represent a return to capital which has been 
spent in improving the land. And thus rent, though gene- 
rally paid in one sum to the same individual, is almost 
invariably made up of two distinct components which re- 
present different claims, or, perhaps, more properly, differ- 
ent kinds of ownership in the soil. This may be readily 
shown by an example of frequent occurrence. By a recent 3foney bor- 
Act of Parliament, the owner of even a life-interest in ^^''^'^'^Z'^'" 

. . permanent 

landed property is enabled to borrow money to be spent m impo-ove- 
drainage or other permanent improvements, such as the ^^^^*^- 
construction of better farm-buildings. The company or 
society who lends the money is guaranteed repayment by 
a rent-charge upon the land for a certain number of years. 
This rent-charge at the present time is usually 6 per cent, 
of the money lent, to be annually paid for twenty- two years. 
The tenants, who receive the first immediate advantages of 
these improvements, gladly allow this rent-charge to be 
added to the rents which they previously paid; and, in this 
manner, their rents are composed of two portions, one of 
which is paid for the use of the land, and the other is paid 
as a return to the capital which has been expended in 
improvements. A nobleman, whose family have been long 
embarrassed, and whose estates have been consequently 
much neglected, has, in this manner, within the last few 
years, spent 70,000/. in improving his estates. The whole 
of this sum has been borrowed upon the conditions above 



150 Manual of Political Economy, 

described. The advantages wliicli have resulted from this 
expenditure have been so great and so immediate that 
the tenants can afford to have their rents increased by a 
much greater amount than the rent-charge of 6 per cent., 
guaranteed to the company which has lent the money. The 
landlord therefore does not, even in the first instance, 
incur any pecuniary sacrifice for these improvements, but, 
on the contrary, he at once obtains an increase of rent, and 
after the twenty- two years have elapsed he is able to 
appropriate to himself the entire benefits which arise from 
this improvement in his land. It seems difhcult to explain 
why landlords who have not capital of their own do not 
more largely avail themselves of the great facilities which 
are offered to them for obtaining the requisite capital to 
improve their estates. In no epoch, probably, has the land 
of England been so greatly improved as during the last 
few years; but, nevertheless, in every county of England 
many important agricultural improvements, such as drain- 
age and the construction of better farm buildings, still 
require the expenditure of a considerable amount of capital, 
to which not only a large prospective but even a large 
immediate profit would be returned. 
Rent is not From Ricardo's theory of rent there can be deduced the 
ofthepHce ^^^^ important proposition, that rent is not an element of the 
of agricul- cost of obtaining agricultural produce. A no less eminent 
duce. ' writer than the late Mr. Buckle has assured his readers 
that the proposition just stated can only be grasped by a 
comprehensive thinker ; we, however, believe that it may 
be made very intelligible by a simple exposition. If 
rent is not an element of cost of production, food would 
be no cheaper if all land was arbitrarily made rent free. 
Let us, therefore, inquire if this would be the case. We 
have frequently stated in this chapter that there is always 
some land in cultivation so poor that it can only afford to 
pay a nominal rent, the produce it yields being no more 
Simple "fct^^^ sufficient to reimburse the expenses of cultivation. 
proof of Let us now suppose that all land is made rent free by 



Rents as determined hy Competition. 151 

an arbitrary edict of the Government. Such an act of book ii. 
spohation, although it would unjustly interfere with the v-2f^^l!l^ 
rights of property, would not cause any diminution in the ^^^ propo- 
consumption of food; the same quantity of agricultural 
produce would be required as before; the same area of 
land w^ould therefore have to be cultivated. That land 
would consequently still require to be tilled which pre- 
viously only paid a nominal rent; but if food was ren- 
dered cheaper, by making land rent free, this land, which 
before only paid a nominal rent, would be cultivated at a 
loss. No person, however, will continue to apply his labour 
and capital if he does not obtain in return the ordinary 
rate of profit, and, therefore, if food became cheaper, such 
land as we have just described would cease to be cultivated ; 
but this cannot be, because the demand of the country for 
food is such that the produce which this land yields can- 
not be dispensed with. It is therefore manifest that food 
would not become cheaper, even if land were made rent 
free. Rent consequently is not an element of the cost of 
production. The value of food is, cmteris paribus, deter- 
mined by the demand for it, because the demand for food 
regulates the margin of cultivation ; and although the pay- 
ment of rent does not influence the cost of producing food, 
yet the amount of rent paid indicates the position of the 
margin of cultivation, and the value of food must rise as 
this margin of cultivation descends. 

We have already remarked that Ricardo's theory im- ^ ctivity of 
plies activity of competition. In many countries, however, Zlmpli^ 
this activity of competition does not exist, but is interfered intlieabove. 
with by various customs. We shall in succeeding chapters 
describe many of the various land tenures which exist in 
different countries, and we shall be thus led to consider 
whether the conclusions deduced from Eicardo's theory 
apply to those countries, such as India, where the tenure 
and the rent of land are influenced by various causes be- 
sides activity of competition. 



152 



I 



CHAPTER IV. 

ON WAGES. 

'T has been impossible to expound the general laws of 
rent without mentioning the other two portions into 
which wealth is distributed; namely, wages and profits. 
Wages But, as yet, we have not examined the laws which regu- 
late wages and profits ; it .will, therefore, be convenient in 
the first place to devote a chapter to the subject of wages; 
we shall then consider profits; and when we have thus 
completed an examination of the laws concerning rent, 
wages, and profits, we shall be in a position more clearly to 
understand some special but important questions concern- 
ing" the distribution of wealth. 
depend In previous chapters we have been careful to show that 

laZemtes capital is the fund from which labour is remunerated. It 
of increase thus becomes obvious that wages in the aggregate depend 
fnTpo^L ^po^ ^ I'^^i^ between capital and population. If the num- 
lation, ]t)er of the labouring population remains stationary, wages 
cannot rise, unless the capital of the country is increased ; 
but if, on the other hand, there is an increase in the num- 
ber of the labouring population unaccompanied by any 
augmentation in the capital of the country, then wages 
must decline. The truths which have been just stated are 
in popular language expressed somewhat differently, for 
wages are commonly said to be regulated by supply and 
demand. This we shall be able to show means the same 
thing, but 'supply and demand' is one of those hackneyed 
phrases which are not unfrequently employed by those 



On Wages, 153 

who Lave no accurate knowledge of political economy, book ii. 
Let us, in the first place, inquire what is the meaning of - — !^ .'.. . 
the expression 'demand for labour' and 'supply of labour'? 
A demand for labour can only be caused by those who have 
the means of remunerating the labourer. But the remu- 
neration which is intended to be given to the labourer is 
capital, and therefore those only can exert a demand for 
labour who can apply capital for the remuneration of 
labour, and the greater is the amount of capital to be 
applied in this manner, the greater will be the demand for 
labour ; it therefore appears that the expression ' demand 
for labour' may be replaced by some such phrase as 
'capital seeking to be devoted to the employment of 
labour.' Again, supply of labour may be estimated by the 
number of those who are anxious to labour, and conse- 
quently an increase in the supply of labour is equivalent 
in its meaning to an increase in the number of the labour- 
ing population. When, therefore, we say that wages wUch is 
depend on the ratio between capital and population, '^^ll^sayirui * 
state the same principle as those who affirm that wages are that'theyde- 
regulated by demand and supply. This latter mode of ex- fupply^cmd 
pressing the principle is not incorrect, but the words demand. 
demand and supply convey no definite meaning, whereas 
every law concerning wages must be deduced from the 
fundamental conce23tion of a ratio between capital and 
population. 

The law which we have just stated goes no farther than Effect of 
to indicate the source from which wages are supplied ; Ij^l^^ondJ- 
this law affirms that wages cannot generally rise or fall, Hon of the 
unless the capital or population of the country is either ^icmes^^^ 
increased or decreased. This law also gives us a know- 
ledge of the only means by which the material condition 
of the labouring classes may be improved. Few questions 
have a more practical or pressing importance. The middle 
and upper classes profess a philanthropic feeling towards 
the poorer, and express an anxious hope that their poverty 



154 Manual of Political Economy, 

BOOK II. may be alleviated. Let us therefore turn our sympathy 
CH. IV. ^^ some practical purpose, and let us endeavour to under- 
stand the true causes of poverty. If we regret that 
an agricultural labourer should only earn nine shillings a 
week, let us take care clearly to comprehend the reason why 
his wages are so low. In no country has capital increased 
so rapidly as it has in England during the last few years ; 
the extension of our commerce and the increase of our 
national wealth have been quite unprecedented. Number- 
less statistics may be quoted, each of which would prove a 
wondrous development of our commerce and trade. In 
twelve years, from 1849 to 1861, our exports advanced from 
60,000,000?. to 120,000,000?., and the import of cotton has 
Why the in the same period nearly doubled. But this increase of 
^wealth^has national prosperity has as yet made but little impression 
7iot im- upon the condition of the labouring classes. This is a melan- 
^heircon- choly and a surprising fact. Those who regret the circum- 
dition. stance, but do not understand its true cause, too frequently 
indulge in vague denunciations against the avarice of the 
employers, and the tyranny of competition. But the em- 
ployers are not to blame, and it has been shown in a 
previous chapter that competition secures to the workman 
the best possible price for his labour. The increase of 
national wealth has been accompanied by such a large 
accumulation of capital that there has been no deficiency 
in the demand for labour. If, therefore, wages have not 
advanced, the supply of labour must have kept pace with 
the demand for labour, or, in other words, the rise of wages 
which would have resulted from an increase of the national 
capital has been counteracted by a corresponding increase 
in the number of the labouring population. If, therefore, 
wages do not rise when the wealth and capital of the 
country increase, it is solely and entirely because an in- 
crease of population causes a greater suppty of labour. 
The labourers cannot fully participate in the advantages 
of a growing national prosperity, unless population is in 



On Wages. 155 



some way or other restrained. Maltlius was the first to book ii. 

enunciate this truth in his celebrated Essay on popula- < '^—L^ 

tion — a work which gave a new aspect to the speculations Malthus's 
of political economists. In this essay the restraints upon ^^^v ^^ 
population are classified as positive and preventive checks, Uon, 
Positive checks on population are, according to Malthus, 
causes over which an individual has no control, such as 
the mortality arising from famine, disease, or the ravages 
of war. In some countries, however, the great majority of 
the people are restrained from early marriages by feelings 
of prudence, and then Malthus considers that the popula- 
tion is kept down by a preventive check. Malthus ex- 
amines the social condition of each country, with the 
view of ascertaining whether preventive or positive checks 
are most efficient in restraining their population. The 
description which from this point of view he gives of the 
most important countries may be still read with great 
interest. His entire essay is most suggestive, and the 
sixty years which have elapsed since its first appearance 
have little detracted from its value or importance. 

It is quite evident that population must be restrained Necessity of 

r 1 1 p •!» 11 • 1 1 J.1 • • 1 J. some checks 

by some checks, lor 11 all married when they arrived at ^^ .copula- 
maturity, this earth would not merely fail to feed, but i^on 
would scarcely even offer standing-room for the countless 
millions that might be born. This may be exemplified by an 
illustration from natural history: 'the elephant is reckoned 
the slowest breeder of all known animals, and I have taken 
some pains to estimate its probable minimum rate of in- 
crease. It will be under the mark to assume that it breeds 
when thirty years old, and goes on breeding until ninety 
years old, bringing forth three pairs of young in this inter- 
val. If this be so, at the end of the fifth century there 
would be alive fifteen million elephants, descended from 
the first pair*.' The population of a country, under favour- 
able circumstances, has been known to double in a period of 

* Darwin, ' Origin of Species.' 



15^ Manual of Political Economy. 



BOOK II. twenty years, and so great is the power of man's multipli- 
> — 1^—1^ cation, that the world might soon be far more densely 
populated than it is now, by the progeny of a single pair, 
if none of those positive or preventive checks which act 
in various countries were brought into operation. It is 
the opinion of Malthus, that throughout the East, and 
formerly in most European countries, a population has 
been restrained by such positive checks as famines, destruc- 
tive wars, negligent rearing of children, and the unskilful 
treatment of terrible diseases, not unfrequently caused by 
an insufficiency of food, and which often appeared in the 
form of periodic plagues. In almost every country these 
checks still operate, but with much less powerful effect. 
In England, for instance, there is a great mortality amongst 
children, which is no doubt chiefly due to neglect on the 
part of the parents. In many districts one half of the 
children belonging to the poorer classes die before they are 
five years old. In some European countries, population is 
restrained by law. In Norway, no couple is allowed to 
marry until it can be proved that the man and wife possess 
jointly a certain amount of money. In other countries, 
prudential feelings, which almost amount to a general cus- 
tom, prevent early marriages, and in this manner restrain 
population. In some of the Swiss cantons, a man rarely 
marries before he is thirty, nor does a woman marry before 
she is five-and-twenty. 
in all, ex- In some exceptional cases, the condition of the labour- 
Txceptiomil ^^^ classes may for a time suffer no deterioration, although 
cases. population should be unrestrained by either positive or 

preventive checks. In a new colony with a healthy climate, 
and a great breadth of fertile and unoccupied land, popula- 
tion may for a time continue to expand with scarcely any 
let or hindrance ; but in a country like England, if the 
population were not restrained by some checks, the labour 
market would soon become so redundant that the labourers 
would be reduced to abject poverty and misery. We can- 



On Wages, 157 

not ex]3ect that capital will in this country be more rapidly book n. 
accumulated than it has been within the last few years; ^.fi^^Il^ 
the wages of labourers, therefore, cannot rise, unless popu- 
lation is restrained even more than it has been. It may 
seem cruel to anticipate that the checks upon population 
will become more effective ; because in this country popu- 
lation is perhaps chiefly restrained by causes which either 
imply human suffering, or at least grave imperfections in 
our social system. The middle and upper classes display, Prudential 
as a general rule, considerable prudence: they do not often ^^^^^^ ^^■ 
marry unless they have a reasonable prospect of being able 
to bring up a family in a state of social comfort, similar 
to that to which they themselves have been accustomed. 
But the labourers, who form the majority of the popula- 
tion, are but slightly influenced by such cautious foresight. 
Even a slight temporary improvement in their material 
prosperity acts as a powerful impulse to induce them to 
marry; for it is a demonstrated statistical fact, that the 
number of marriages invariably increases with the decline 
in the price of bread. In the case of the labouring classes, are not suf- 
jDrudence is replaced by other restraints upon population, fi^^^'^^^V. 
which indicate a state of society deeply to be deplored, the lahour- 
Of the children belonging to the upper and middle classes, **^^ <^^(^^<^S' 
only twenty per cent, die before the age of five. This pro- 
portion is more than doubled in the case of children belong- 
ing to the labouring classes. This great mortality amongst 
poor children is caused by neglect, by want of proper food ; 
sometimes the parents are too poor to rear their children 
properly, but too frequently the premature death of an 
infant is due to the parents' intemperance. If, therefore, 
the children of the poor had during the last ten years been 
treated with proper care, there would be in this country, 
at the present time, 1,150,000 more children than are now 
living. In this manner may the supply of labour be 
vastly increased. And yet, if we place any faith in the 
progressive improvement of the people, we must believe 



158 Manual of Political Economy, 

BOOK II. that the check upon population we have just noticed, 
> — !^ — L^ so replete with misery, and associated with so much 
human depravity, will be gradually weakened. But if 
this be so, then it will be most important that the labour- 
ing classes should, with regard to marriage, exhibit some 
prudence ; for if this is not done, when these other checks 
upon population are removed, the labour-market will be 
so over-supplied, that the material condition of the labourer 
must rapidly deteriorate. We have yet, however, to 
notice one check upon population, which has already re- 
lieved us of much surplus labour, and which has been 
peculiarly beneficial in all its other consequences. 
Emigration During the last few years, there has been a large emi- 
to popula- g^^tion from Great Britain to the United States, and to our 
tion. various colonies. Between the years 1848 and 1864 the 

total number of emigrants from the United Kingdom has 
been 3,350,000. Had there not been this emigration, 
these three millions would have remained at home to have 
shared the wage-fund with other labourers of the country, 
and wages would have been greatly reduced. But this ^ 
consideration suggests only a very small portion of the 
advantage which has resulted from this emigration. Our 
emigrants leave an over-supplied labour-market, and settle 
in countries where great natural resources have been un- 
developed, and where vast tracts of fertile land have been 
untilled, because no adequate supply of labour has been 
forthcoming. The returns to labour applied under such 
favourable conditions are of course very great : wealth is 
quickly created, and tracts of land thus peopled by our 
emigrants rapidly become prosperous commercial commu- 
nities. Many of the nations which have been, as it were, 
created by our emigration, afford the mother-country a 
supply of cheap food, and thus confer upon her a most 
important benefit. This naturally leads us to consider 
other causes which produce a deterioration in the condition 
of the poor, and which also impede prosperity, when, in a 



On Wages, 159 

thickly-peopled country like our own, population is not book ii. 
either restrained, or else relieved by some such agency as v_ff:,iZl^ 
emigration. 

We have frequently stated that agricultural produce The tend- 
must rise in price if it becomes necessary to resort [to less y"J^ f^ j^. 
fertile land in order to obtain food for an increasing popu- come dearer 
lation. Rent, as we have already demonstrated, does not ^^^ ^^^.^ 
form a part of the cost of producing food, for its price is vances, in- 
regulated by the expense of obtaining produce from ^^'^^'^labourer. 
which is so poor that it can only pay a nominal rent. If, 
therefore, our population rapidly advanced, and our de- 
mand for food was so great that we were compelled to re- 
sort to land far too barren to be now cultivated, under such 
circumstances food would become much more expensive. 
It must be always borne most carefully in mind that food 
must rise in price as population increases, unless supplies 
of cheap food are imported from other countries, or agri- 
cultural improvements render our own soil more produc- 
tive. If, therefore, emigration does not relieve the labour- 
market of its surplus population, the condition of the 
labourer will be injuriously affected in two distinct ways: 
in the first place, his money-wages will diminish, because 
there will be a greater number amongst whom to distribute 
the wage-fund; and secondly, the necessaries of life will 
rise in price, because there wdll be a greater demand for 
food. If our constantly-increasing population had to be 
supplied with food entirely from our own soil, it is doubtful 
whether a sufficient quantity of even the necessaries of life 
could be obtained ; but even if there was not an absolute dearth 
of provisions, food would under such circumstances enor- 
mously rise in price, and the greatest distress amongst the 
labouring classes would be sure to ensue. Some articles of 
food cannot be so easily imported as others. The expense of 
sending corn from even the most remote parts of the earth 
is, comparatively speaking, so trifling, that large quantities of 
wheat are now annually imported into Europe from California. 



i6o Manual of Political Economy. 

The remarks wliich we have just made upon the 
tendency of food to become dearer as population advances, 
This evil is enable us to attribute another most beneficial influence to 
^•'^?dh^' ei^igi'^tion ; for not only is the home labour-market re- 
emigration. lieved by emigration, but it also promotes the development 
of countries to which we must chiefly look for supplies 
of cheap food. Emigration, therefore, is not only a very 
efficient check upon population, but it is in every respect 
most beneficial in its results; it causes wages to rise, or 
rather prevents their fall in those countries from which 
emigration takes place, and by providing supplies of cheap 
food, it indirectly confers upon the labouring classes 
another most important advantage. • So vast are the tracts 
of unoccupied fertile land, upon which our countrymen 
might with advantage settle, that we may perhaps consider 
emigration to be yet only in its infancy. The rise of 
Australia has been most rapid, but she is still most thinly 
populated. It has been calculated that Australia possesses 
enough fertile land to maintain in comfort a population of 
100,000,000. The Cape of Good Hope is only beginning 
to be colonised, and in North and South America there 
are still many large tracts of land scarcely peopled, yet 
possessing great natural advantages, and well suited for 
European emigrants. It is often said that emigration 
must, after a time, cease to be a remedy for over-population. 
Some of the facts we have already mentioned show that 
population has, under favourable conditions, such a high 
rate of geometrical increase, that our colonies might, before 
a long period has elapsed, become as thickly peopled as the 
mother-country. Emigration would then no longer afford 
relief. This, as a mere theoretical anticipation, cannot be 
denied; but the day when the earth shall become thus 
densely populated is, we believe, too remote for us to feel 
any concern about the difficulties which will result from 
such an occurrence. 

We have now endeavoured to point out that the average 



On Wages, i6i 

rate of wages received throughout the country depends book h. 
upon a ratio between capital and the number of the . ^" ; ^^' . 
labouring population. The capacity of the labouring 
population to increase is so great, that if some powerful 
checks are not placed upon population, the condition of 
the labourer must rapidly deteriorate, for the greatest 
accumulation of capital that has ever occurred would 
entirely fail to create a demand for labour in any way 
proportionate to the supply of labour which would be 
forthcoming, if man's power of multiplying his species was 
not restrained by some very efficient causes. We have, 
therefore, thought it important to indicate some of the 
chief checks upon population which act in different 
countries. When referring to the checks which operate 
in our own country, we have remarked upon the great 
benefits which result from emigration; we have attributed 
special advantages to emigration, because it is often in- 
strumental in providing us with supplies of cheap food, 
and this is all important to a country already thickly 
peopled, and whose population is rapidly advancing. For 
if a country in the position of England was restricted to 
its o^vn soil for food, the first necessaries of life would very 
soon reach a famine price ; in fact, it is no exaggeration to 
assert that England's future advance in population and 
prosperity will depend upon the extent to which she will 
be able to obtain cheap food from other countries. 

It still remains for us to explain many important Variation 
questions connected with wages ; such, for instance, as the %Zrmt ^^ 
different rates of remuneration received in different em- emi^loy- 
ployments. For not only are higher wages paid in some '"^^^^^' 
trades than in others, but it may be frequently observed 
that the wages of one particular class of workmen may 
rise or fall to a very considerable extent without any 
variation at the same time taking place in the wages of 
other employments. Special circumstances are connected 
with various employments, which must have the effect of 

M 



1 62 



Manual of Political Economy, 



Causes as- 
signed by 
A dam 
Smith. 



Agreeable' 
ness of the 
employ- 
ment. 



Difficulty 
of learning 
it. 



producing permanent variations in the wages paid' in 
different trades. Adam Smith divides the causes which 
produce different rates of wages into the five following 
classes : — 

1st. The agreeableness or disagreeableness of the em- 
ployments themselves. 

2ndly. The easiness and cheapness or the difficulty and 
expense of learning them. 

8rdly. The constancy or inconstancy of employment in 
them. 

4thly. The small or great trust which must be reposed 
in those who exercise them ; and 

othly. The probability or improbability of success in 
them. 

Examples of the effects which may be attributed to 
each of these different kinds of causes will readily suggest 
themselves. A collier proverbially earns higher wages 
than even many skilled workmen in his own district. A 
collier, not working so many hours in a day, will often 
earn more wages than a carpenter. But coal mining is 
not only a very laborious, but a very dangerous occupation. 
The work is dirty: a man has to labour in the dark, and 
often in very bad air. When all these circumstances are 
considered, it is easy to understand that men would not 
work in coal mines unless they were induced to do so by 
very high wages. 

The second circumstance mentioned by Adam Smith 
probably produces a greater influence on wages. If a 
trade is difficult to learn, an apprenticeship fee has often 
to be paid as a premium for the necessary instruction. 
This, in the first place, greatly limits the number of those 
who can be brought up to the trade, for comparatively few 
labourers, even if they were inclined to do so, have the 
means to pay such a fee for any of their children ; but the 
apprenticeship premium represents only a very small por- 
tion of the cost a parent must bear if he brings a child up 



On Wages, 163 

to a skilled trade. An apprentice not unfrequently works book ii. 
for four or five years without receiving any wages at all, . ^"^-J^- _ 
and therefore such a youth, until perhaps he is twenty 
years of age, must be kept by his parents. If, however, he 
had entered upon some ordinary, unskilled employment, he 
would have been receiving increasing wages from the 
time he first began to work. Every skilled workman has 
had a certain amount of capital spent in acquiring the 
skill his trade requires, and this capital would of course 
not be spent unless an ample future return was given to 
it in the form of higher wages. The difference in the 
wages of skilled and unskilled labour represents a large 
return to the capital which has been spent in the skilled 
workman's education. This must be so, whilst so few of 
our workmen have either the foresight or the means to 
bring their children up to some skilled employment. 
Skilled workmen therefore possess, as it were, the advan- 
tages of a monopoly. In some skilled employments a 
monopoly is created by nature, for the skill required is so 
great that few have the natural capacity ever to acquire 
it. Thus, as we have previously mentioned, there is a very 
limited number, a^mongst all the watchmakers in England, 
who can ever acquire that delicate accuracy of workman- 
ship which is needed in the construction of a chronometer. 
Such workmen, therefore, are endowed with a natural 
monopoly, and they can, within certain limits, obtain al- 
most as high wages as they choose to demand. 

The third circumstance mentioned by Adam Smith — Constancy 
namely, the constancy or inconstancy of employment — he %omnmt. 
very aptly exemplifies by the case of builders' operatives. 
'In the greater part of manufactures, a journeyman may 
be pretty sure of employment almost every day in the 
year that he is able to work. A mason or bricklayer, on 
the contrary, can work neither in hard frost nor in foul 
weather, and his employment at all other times depends 
upon the occasional calls of his customers. He is liable, 

m2 




Manual of Political Economy. 

in consequence, to be frequently without any work. What 
he earns, therefore, while he is employed, must not only 
maintain him when he is ' idle, but make him some com- 
pensation for those anxious and desponding moments 
which the thought of so precarious a situation must some- 
times occasion. When the computed earnings of the 
greater part of manufacturing operatives, accordingly, are 
nearly upon a level with the day wages of common la- 
bourers, those of masons and bricklayers are generally from 
one half more to double those wages.' 
Amount of With regard to the fourth cause mentioned by Adam 
trust re- gj^iith, it may be remarked that, when a great amount 

posed in the ' *' , . ^ . 

labourers, of trust is requisite to be reposed m a labourer, his wages 
are of course higher. A labourer, when he has demon- 
strated that he possesses such qualities as will cause his 
employer to place confidence in him, can of course claim 
higher wages, and the employer who gives these higher 
wages is abundantly recompensed. A jeweller has to 
intrust valuable property to his workmen, and if confidence 
could not be reposed in these workmen, their employer 
would be at a considerable outlay in order to have them 
constantly watched, and he would be likewise subjected to 
various other losses and annoyances. A considerable por- 
tion of the cost of any commodity does not arise from the 
labour employed in actually producing it, but is caused 
by the expense of superintending and watching this labour. 
An employer might dispense with such an outlay if he 
felt assured that his workmen could be trusted; and such 
an employer would readily devote a part of the expense 
thus saved to raise the wages of those he employed. 
ProhaUUty The following is the fifth and last cause enumerated by 
of success. ^^g^T^^ Smith. ' The wages of labour in different employ- 
ments vary according' to the probability or improbability 
of success in them.' This circumstance but very slightly 
affects those who are usually considered to belong to the 
wage-receiving class. If a youth is brought up as a shoe- 



On Wages, 165 



maker, it is almost certain that he will acquire the art book ii. 

CTiT IV 

of shoemaking. In some of the liberal professions, how- ^ — '-^—^ 
ever, such as the law and medicine, the large remuneration 
received by a few may perhaps be considered to be partly 
counterbalanced by the number of those who fail to earn 
from these professions a competency in any degree propor- 
tioned to the expense which their professional education 
has involved. But we think Adam Smith, even in the Effect of 
case of the liberal professions, has attributed too much ^H^^i 'J.^. 
influence to the cause above mentioned. The uncertainty /essions. 
of success in such a profession as the bar is not due to a 
difficulty of ascertaining beforehand whether an individual 
possesses those talents which will fit him for such a pro- 
fession. Success is uncertain, because it depends on extra- 
neous conditions which an individual cannot control. A 
barrister may have brilliant abilities, but unless he hap- 
pens to be acquainted with a solicitor he may wait for 
years without a brief In many professions, too, although 
the fees paid may appear to be high, yet the average 
earnings are extremely small. Moreover, in the choice 
of a profession other motives act more powerfully than 
a prospect of gain : a profession gives position in society, 
and men of property are often happier with an occupation 
than without one. When therefore any question is con- 
sidered relating to wages, or to the profits of trade, a dis- 
tinction ought to be made between the liberal professions 
and other occupations which are resorted to almost en- 
tirely for the purpose of gain. A clergyman who is only 
obtaining 90?. a year, may feel assured that if he was 
engaged in some other occupation his income would be 
far larger ; but such a man may be prompted by a high 
sense of duty to enter the Church, and therefore he 
chooses his profession quite independently of pecuniary 
considerations. With regard to trade, no such feelings 
can exercise any practical influence ; no one can feel that 
it is his duty to be a grocer rather than a baker ; a man 
usually chooses the trade or employment to which he has 



1 66 Manual of Political Economy. 

BOOK ir. been broiight up, or the one in which he thinks he can 

CH IV *— ' X 

« — ^^ — 1/ earn the most money with the most pleasure, or rather 
the least inconvenience to himself. 

We have now separately remarked upon the five classes 
of circumstances to which Adam Smith attributes the 
different wages paid in different employments. Consider- 
able influence is no doubt produced by each of these 
Other cir- classes of circumstances ; but wages are perhaps more 
^woduoe^a ^ff"scted by other causes which are much less frequently 
t^an'afiowo/ considered. For instance, a fact with regard to wages must 
have been noticed by even the most casual observer, since 
not only do the wages of different employments vary, but 
there are great variations in the wages obtained in the 
same employment in different parts of the country ; it may 
moreover be remarked that variations of this kind are par- 
ticularly striking with regard to many unskilled employ- 
ments. During the winter months an ordinary agricultural 
They vary labourer in Yorkshire earns thirteen shillings a week. The 
'^dlstncts^ wages of a Wiltshire or Dorsetshire labourer doing the 
same kind of work, and working a similar number of hours, 
are only nine shillings a week. This great difference in 
wages is not counterbalanced by other considerations ; 
living is not more expensive in Yorkshire than in Dorset- 
shire, and the Dorsetshire labourer does not enjoy any par- 
ticular advantages or privileges which are denied to the 
Yorkshire labourer. This inequality in wages is not merely 
a temporary difference, and the question naturally arises, 
How can such a great variation in the wages of the same 
employment be permanently preserved? Why does not 
the Dorsetshire labourer remove to Yorkshire, where he 
would be able to obtain thirty per cent, more for his la- 
bour ? The obstacles, however, to such a migration are too 
formidable to be overcome even by such a premium as is 
offered by this difference in wages. In the first place, a 
Dorsetshire labourer can seldom either read or write; he 
therefore has little or no information with regard to the 
wages paid in other districts. His ignorance magnifies the 



On Wages. 167 

difficulties of removing to a distant part of the country, and book ii. 
makes him disinclined to leave the locality to which he has . ^"/ ^'.y 
been accustomed. Again, if he has a family, he is far too 
poor to pay the expense of conveying them to a compara- 
tively distant place : for we have carefully ascertained the 
fact that an agricultural labourer has rarely saved even a 
few shillings. Moreover, there is associated with our system The law of 
of poor-relief a law of settlement which has often bound 
and fettered the labourer to the district in which he was 
born. No law has perhaps ever more grievously oppressed 
a class. A man by resorting to a place not far distant 
may much improve his position ; employment there might 
be much better, and he would therefore get higher wages ; 
but the law of settlement often prevents him availing 
himself of these advantages : he is not allowed to settle in 
another district because it is feared that he or his family 
may some day become chargeable on the poor rate. 

The combined influence of the causes just enumerated 
prevent labourers readily migrating from one district to 
another in order to avail themselves of the advantages 
which they will secure from a greater demand for their 
labour. We therefore obtain a more accurate conception, 
of many of the phenomena connected with wages, if we 
regard a country like our own to be composed of distinct 
provinces in which within certain limits different rates of 
wages may prevail, or, in other words, different relations 
may exist between population and capital, or between the 
demand and the supply of labour. It is important to bear These facts 
this in mind when we practically apply those general laws ^l^^^^^j^' 
of wages which have been described at the commencement theprinci- 
of this chapter. But let it not for one moment be ^^"^V- aboiT^^"^ 
posed that these laws are less true because it is necessary 
to place some limitation upon their general application. 
The wages of the Dorsetshire labourers depend as abso- 
lutely on a ratio between capital and population as if these 
labourers readily passed from one part of the country to 



i68 



Manual of Political Economy, 



condition. 



BOOK IT. another ; but their wages are far more affected by an 
. ^^'/^' . increase or decrease of capital and population in their own 
district than by any change in the capital or population of 
the whole country. It is also evident that if Dorsetshire 
labourers will not go to Yorkshire, the wages of the York- 
shire labourers are but slightly affected by any increase in 
the population of Dorsetshire. But wages in Yorkshire 
will inevitably be affected if there is any alteration in the 
amount of the capital invested in the district, or if there 
is any increase or decrease in the number of those who 
are seeking employment in the locality. If therefore it is 
thought that the wages in any particular district are too 
low, there is only one way in which they can possibly be 
Means of raised. Sympathy will do little for the Dorsetshire 
improving labourer if his wages are to be advanced : it can only be 
bourer's done either by bringing more capital into the county, or 
by diminishing the supply of labour. This may be 
effected either by foreign emigration, or by some of 
the able-bodied labourers removing from these ill-paid 
districts to localities where wages are higher. We consider 
that such a foreign emigration and such a home emigra- 
tion, if it may be so described, has' already greatly bene- 
fited the agricultural labourers. Their wages, we believe, 
have risen within the last ten years. The result of the last 
census not only explained the cause of this improvement, 
but affords the most positive proof of its reality. The 
census of 1861 reveals the fact, that within the last decade 
the population in none of the purely agricultural districts 
has increased, and in many it has declined. No one can 
suppose that less capital is invested now in agriculture 
than was invested ten years since. The census figures 
therefore incontestably demonstrate that agricultural wages 
have risen. This is a result at which philanthropists 
ought to rejoice ; but so remarkable is the ignorance of 
economic principles, that when the census returns first 
became known, the public seemed to regret this decrease 



On Wages. 169 

in the population of the agricultural districts, as if it book n. 
denoted misery and distress, instead of proving that our ._^^- /^- . 
worst paid labourers were becoming more prosperous. 

Every year various causes are in operation which act The dif- 
with increasing effect to lessen these inequahties in wages {^^e^^^^.J^s 
which we have just been noticing. A few years since the of wages in 
greatest differences in the price of commodities prevailed ^^tricts 
in different parts of the country. Communication was so tends to 
difficult, that some article of food which was often an ex- ^^^^*^^* *• 
pensive luxury in one part of the country could be had in 
abundance in another part. Poultry was four times as 
dear in London as in many country districts. Railways 
have changed all this, and now provisions are almost as 
cheap in London as they are at a distant place like Aber- 
deen ; and as people gradually avail themselves of the easy 
means of communication between one district and another, 
wages in the same employment will throughout the country 
approximate to one uniform rate. The more intelligent of 
our workmen would freely leave the place in which they 
were employed if they thought that by doing so their 
prospects would be improved; and as our agricultural 
labourers gradually become more intelligent, they will 
show an equal readiness to avail themselves of any advan- 
tage which might be offered to them by a more favourable 
state of the labour-market in some other locality. The 
strong opposition which has been expressed to the law of 
settlement has already caused it to be somewhat modified. 
The law is no doubt destined to be abolished: this will 
remove a restriction which has seriously impeded the 
labourer from offering his labour where he might consider 
it would meet with the best reward. 

The reasons we have mentioned plainly show that ^XvyHna^te 
wages in Yorkshire may vary greatly from wages of the ^''.^^'^^ 
same employment in Dorsetshire; but although we can Yorhhire 
thus understand that such a difference in the remuneration '^^'J "* 
of labour may exist, yet it becomes necessary to allude to shire, ' 



170 Manual of Political Economy. 

BOOK ir. the circumstances which cause wages to be higher in 
^_£!1:^^I:_, Yorkshire than in Dorsetshire. Why does the capital 
invested in agriculture in Yorkshire bear a different re- 
lation to the number of the agricultural population from 
that which it bears in Dorsetshire? Yorkshire, tmlike 
Dorsetshire, is not merely an agricultural county: it has 
a most thriving manufacturing industry; therefore in the 
former county a great many other employments besides 
agriculture compete for the labour of the agricultural 
population. We are aware that an agricultural labourer 
is not suddenly converted into a cloth-weaver. Such a 
transition rarely takes place, but if there is a manufac- 
tory close at hand, many of the children of the agricul- 
tural labourers will be employed in it. There is always 
connected with an active manufacturing industry much 
subsidiary work which can be performed by any ordi- 
nary labourer. Such work, consequently, draws off many 
labourers from agTiculture, and thus the higher wages 
paid in Yorkshire may be entirely explained by those 
general laws which regulate all wages: for there, as in 
every other case, it is a question between population and 
capital, the agricultural population of Yorkshire being 
diminished by the frequent employment of the labourers 
themselves in other work, and by the engagement of their 
children in manufactories. 
Influence It is popularly believed that wages are determined by 
exerted on other causes than those which we have enumerated: for 
good trade; instance, there are few who do not suppose that wages are 
high when trade is good, and low when trade is bad. We 
shall proceed to show that this opinion is erroneous, and in 
doing so we will explain the exact influence which is 
exerted on wages by good or bad trade. Now in England, 
where capital is accumulated with such astonishing ra- 
pidity, the amount of capital which might be invested in 
any particular industry could be immediately increased 
beyond almost any assignable limits. Suppose the pror 



On Waaes, 171 

spects of the cotton trade were so good, that the Lancashire book n. 
manufacturers thought they could profitably invest an ^^r ^^' . 
additional 10,000,000Z. in their trade. Many of them 
would withdraw capital for this purpose from other in- 
vestments, and there would be no difficulty whatever in 
making up the whole 10,000,000Z. required by obtaining 
advances from bankers and others on the credit of the 
individual manufacturers. It would not, however, be 
possible with equal rapidity to make such an increase in 
the labour employed in any particular industry. One who 
is accustomed to other work cannot without considerable 
practice acquire the" skill of a cotton-operative. Many of 
the processes of cotton-spinning could not probably be 
learnt by an adult, for their manipulation requires fingers 
trained from childhood. New capital in various forms, ly attract- 
such as larger quantities of raw material, may be at once J"^^^ " 
brought into any particular industry; but when those who cular em- 
have been accustomed to the industry are once fully em- ^^ ^V^^^ *• 
ployed, an increased supply of labour can then be only 
gradually obtained. Hence it appears that the labourers 
of each separate trade possess, as far as the supply of 
labour is concerned, a monopoly for a limited period. 
This will explain the benefit which is observed to result 
to any class of labourers when their special trade happens 
to be prosperous. Reverting for an illustration to the 
manufacture of cotton, let us consider what takes place 
when this trade is unusually active, as it was during the 
years 1859 — 60. Throughout this period cotton manu- 
facturers realised such large profits, that they were anxious 
to spin as much yarn and weave as much cloth as they 
possibly could. They therefore had every inducement to 
apply to their business the greatest possible amount of 
capital that was practicable; this amount of capital was 
limited, not by any deficiency in the supply of capital, but 
new mills and machinery could not be at once created, and 
therefore it was no use for a manufacturer to buy more 



172 Manual of Political Economy. 

BOOK Ti. raw material, or employ more labour than was suited to 
cij.iv. ^i^Q mills and machinery at his command. But every 
manufacturer during such times does as much trade as 
possible; he will therefore compete for labour; every 
cotton operative is thus certain to be fully employed at 
very high wages, and consequently the prosperity of any 
particular branch of trade, for a time, confers a great tem- 
porary benefit upon the labourers who are engaged in it. 
The benefit We say temporary benefit, because if the good trade con- 
f erred on tinned, and wages remained exceptionally high, an addi- 
the la- _ tional supply of labour would at length be forthcoming. 
temporary. People would be gradually attracted from other worse-paid 
employments, since the high wages would offer them a 
temptation to learn a new trade. Every parent in the 
district would have a great inducement to bring his 
children up to the trade which we have supposed has 
become so suddenly prosperous ; and this accession of 
juvenile labour would be the chief source from which will 
be gradually supplied an additional quantity of labour, 
sufficient to meet the increased demands of the trade. 
If the skill which any industry requires is particularly 
great, the labourers of the trade possess a more complete 
monopoly, because under such circumstances it would be 
more difficult and take a longer time to import labour 
from other employments. The labourers fully understand 
the advantages of a trade monopoly, and they constantly 
strive to maintain such a monopoly by various restrictions 
'as to the number of apprentices who should be admitted 
into any trade. In order to effect these purposes. Trades 
Unions have been established. It will be better, however, 
to defer our remarks upon these societies, and the various 
other means which have been often resorted to in order to 
secure higher wages, until we have discussed the subject of 
profits, for we shall then have completed our examination 
of the general laws which regulate the distribution of wealth 
into the three primary divisions of rent, wages, and profits. 



173 



R 



CHAPTER V. 

PROFITS. 



ENT, wages, and profits, the three portions into whicTi ^ook h. 
wealth is distributed, denote the remuneration received 



by different classes of individuals for the assistance which 
they may have rendered towards the production of wealth. 
Those who have appropriated land receive a remuneration 
in the form of rent when they permit others to use the 
land which has been so appropriated. Those who apply 
their labour to the production of wealth receive wages as 
a reward for this physical exertion ; and profits denote 
the remuneration which those receive who supply the 
remaining requisite of production, namely capital. As Profits are 
capital is the result of saving, the owner of capital exercises nation paid 
forbearance when he saves instead of spends his wealth ; ^o f^^ 
profits therefore are the reward of abstinence, in the same ' 

manner that wages are the reward of physical exertion. 
If an individual invests a certain sum in any productive 
employment, his profits will consist of the entire sur- 
plus which remains after the capital has been replaced. 
Suppose an agriculturist cultivates his farm with a capital 
of 5,000?. ; this capital will be composed of many different 
elements, such as stock, implements, and a fund from 
which he is able to advance the wages of his labourers. 
The profits of the farmer will consist of the surplus whicli 
remains, when from the whole produce of the farm sufficient 
has been deducted to replace the original 5,000?., the value 
of the cajpital which the farmer possesses. But in such a 



174 



Manual of Political Economy. 



BOOK II. 
CH. V. 



and may 
he divided 
into three 
parts. 



case these profits of tlie farmer will not simply represent a 
return to his capital, or, in popular language, interest for 
his money ; the farmer has probably given his own time 
and labour in watching those whom he employs, and in 
superintending the various operations of his farm : he has 
of course to be remunerated for his time and trouble, a,nd 
therefore part of his profits represent the wages properly 
due to this labour of superintendence. Again, every busi- 
ness is attended with more or less risk. If a man invests 
his capital in the funds, he may regard it as perfectly 
secure, but capital invested in business can never be made 
equally secure against possible loss. There may be re- 
vulsions in trade, bad debts ; and property invested in any 
commercial undertaking is subject to depredations of the 
dishonest, and in some countries to the rapine of internal 
war. A capitalist therefore must receive some compensa- 
tion for the increased risk of loss which is incurred when 
his capital is invested in trade ; a portion of his aggregate 
profits represents this compensation. The profits there- 
fore which a man obtains from his business are composed 
of the three following elements. 

1st. A reward for saving, or, more properly, a reward 
for abstinence. 

2nd. A compensation for the risk of loss. 
3rd. Wages for the labour of superintendence. 
Reward for It is very easy to ascertain the portion of profits which 
saving. ought in any particular instance to be allotted as the re- 
ward of saving. In every commercial country there are 
investments, the security of which is regarded as perfect. 
In our own country, for instance, the funds, a freehold 
mortgage, a railway debenture, a stock guaranteed by our 
own Government — all these are securities which are re- 
garded as free from all risk. The interest which is obtained 
from capital invested in these securities may be considered 
as entirely the remuneration for saving. He who so invests 
his capital cannot receive any remuneration for risk, when 



Profits, 175 

there is none, and the investment entails no labour upon 
him. The interest which is obtained from such secuiities 
is termed the current rate of interest ; and therefore the 
first element of which profits are composed may be always 
estimated in amount by the current rate of interest. If 
the current rate of interest is four per cent., a capital of 
5,000^. would secure a profit of 200?. without the slightest 
risk or trouble. A person therefore who has 5,000Z. invest- 
ed in his business might consider that 200?. of his annual 
profits represents interest on capital, or, in other words, is 
the remuneration which he receives for his abstinence. 

In many cases it is more difficult to estimate the amount Compensa- 
of the second of the three elements of which profits 8iie^^^2 
composed — namely, remuneration for risk. Sometimes, 
however, a man of business pays to others a certain portion 
of his profits to compensate him for any particular loss or 
risk to which his business may be exposed. Such a pay- 
ment is termed an insurance. In this country it is almost 
a universal practice to insure against fire. Merchants 
insure their vessels against shipwreck ; farmers not un- 
frequently insure their crops against the loss which may 
be incurred by severe hail-storms ; farmers may also now 
insure their live-stock. The sum which is spent upon any 
of these insurances has of course to be deducted from the 
gross profits ; but such insurances cannot cover the whole 
risk to which an individual's capital is exposed when in- 
vested in business. Thus the whole of a farmer's profits 
may be destroyed by unpropitious weather. In 1860 the. 
crops were so bad, in consequence of the continued wet 
w^eather, that many farmers obtained no profit whatever ; 
but although it is very difficult to apportion the exact 
amount of profits which might, in any particular business, 
be considered as a fair remuneration for risk of loss, yet it 
can readily be ascertained that some businesses and trades 
are subject to far greater risks than others; and therefore 
we should expect to find that the profits would be greatest 



176 



Manual of Political Economy. 



and remu- 
neration 



in tliose trades whicli are most hazardous, so that the in- 
creased risk may be thus compensated. If an individual 
embarks his capital in some undertaking which he does not 
himself superintend, but which returns him a large interest, 
the excess of the interest so obtained above the current 
rate of interest represents the increased risk. Shares can 
always be purchased in English copper mines which will 
pay an interest of ten per cent., but it is impossible to 
foresee how long a copper mine will continue productive; 
every indication may be most promising, but a slight 
alteration in the strata may at once destroy the value of 
the lode. If, therefore, an individual obtains ten per cent, 
from a copper mine when the current rate of interest is 
only four per . cent., six per cent, may be regarded as a 
return for the hazardous nature of the speculation. 

The amount of the remaining element of which profits 
are composed — namely, the remuneration for the labour 
intendence. of superintendence — may be estimated by deducting from 
the gross profits the amount due to the first and second 
elements of profits which we have been just discussing. 
The remuneration which is obtained for this labour of 
superintendence is influenced by many of the same causes 
which affect the wages of ordinary labour. Some employ- 
ments require for their superintendence greater skill, and 
greater patience, than others ; some are more disagree- 
able to superintend than others. If this be so, then the 
remuneration of the labour of superintendence will be' 
greater in one case than in the other. The caprice of 
society often gives to some employments a social dignity, 
which is refused to others; and this consideration enables 
us to explain the proverbially low profits obtained in this 
country from farming compared with the profits of many 
retail trades. Society now considers that a man of high 
family may with propriety occupy himself with farming; 
agricultural pursuits are extremely healthy, and thoroughly 
congenial to English tastes. A person does not require a 



Profits, i-jj 

tedious aj)prenticesliip, or an expensive special education, book ii. 

to qualify himself to be a farmer. Many men therefore < '^-^ 

consider that they are almost sufficiently remunerated for 
the labour of superintending the cultivation of their farm 
by the health and pleasure derived from the occupation. 
They therefore do not expect to receive any considerable 
return for the labour of superintendence. The gross 
profits of farming are consequently extremely small, com- 
pared with the profits of many retail trades. A grocer 
not only expects to receive as much interest upon the 
capital invested in his business as does the farmer, but, in 
addition to this, must also receive an adequate remunera- 
tion for superintending the details of his business. A man 
is induced to carry on the grocery trade, with no other 
object but to obtain profit from it; he is not attracted to 
the occupation by the prospect of securing health and 
pleasure. 

Interest on capital, insurance for risk, and remuneration Interest on 
for labour of superintendence, are therefore the three ,fn,ains con- 
elements of which profits are composed. The first, interest «^^^^ «.^ ^^^« 
on capital, is represented by the current rate of interest, andj^lace. 
and therefore may be regarded as a constant quantity for 
all occupations at the same time, and in the same country. 
We say at the same time, and in the same country, because 
not only is the current rate of interest much higher in one 
age than in another, but very different rates of interest 
prevail at the same time in different countries. Thus the 
current rate of interest in England is now about four per 
cent., whereas, two centuries since, it was at least eight 
per cent. ; and although at the present time the current 
rate of interest is only four per cent, in England, it is at 
least ten per cent, in Australia. The cause which produces 
these variations in the rate of interest will be explained in 
a future chapter. 

In considering the profits of different trades, the amount ^enc«? pro- 
to be allotted to interest on capital is the same for all 

N 



178 Manual of Political Economy. 

BOOK II. trades in tlie same country; the different ra-tes of profit 
. ^^ •^ ^' . which prevail in different occupations must, therefore, be 
when remu- attributed to variations in the remaining components of 
neration profits, namely, insurance for risk, and remuneration for | 
and sic2oer- labour of Superintendence. If larger profits are obtained 
intendence jj^ ^j^q -t^ade than in another, we must be sure that, in 

vanes. . , . , . . , , . 

the one trade, capital is subject to greater risk than m 
the other, or the labour of superintending the one trade 
requires a higher remuneration than in the case of the 
other; if, therefore, in any trade a permanently higher 
rate of profit prevails than in other trades, it must be due 
either to the operation of these causes, acting singly, or 
combined. But we have given agriculture as an example, 
to show that the profits in a particular branch of industry 
may be extremely small, because various circumstances 
connected with the trade cause a slight remuneration to 
be given to the labour of superintendence. Consequently, 
the various trades and occupations of which the industry 
Each trade of the country is composed, will each have a scale of profits 
has a cer- ■pQQ^^i[^Y to itself, the appropriate amount of profits which 
of profit, belong to each trade being determined by various causes, 
just in the same way as the wages of different employ- 
ments are regulated by particular circumstances, which we 
have described in the last chapter. But such an assertion 
may, at first sight, seem to contradict a principle of politi- 
cal economy, perhaps more frequently quoted than any 
other; namely, that the profits of different trades have a con- 
stant tendency to become equalised. The principle, when 
properly understood, is true; the apparent contradiction 
admits of ready explanation. When the profits realised in 
any business are just sufficient to give an adequate com- 
which may pensation for interest on capital, for risk against loss, and 
he called _ £qj. labour of superintendence, then it is said that the 
rate of natural rate of profit is obtained ; and hence it would appear J 
profit. ^YiSit each separate trade has a natural rate of profit peculiar 
to itself, because this rate of profit must give a proper 



Profits. 179 

remuneration for the three elements of which profits are book n. 
composed; and two of these, namely, the insurance against ^!!i;2:_. 
risk, and the wages of superintendence, vary in different 
industrial occupations. If the current rate of interest 
permanently rises, an effect is produced upon the profits of 
all businesses, and the natural rate of profit in every busi- 
ness rises. But if any circumstances should occur which 
should increase the chance of loss in a particular trade, 
without affecting others, then the natural rate of profit 
belonging to this particular business would be increased. 
The natural profits of farming are low, because English 
tastes are such as to make farming a pleasurable occupa- 
tion. As we have now explained the meaning Avhich we 
assign to the term natural profits, we shall find great 
advantage in employing this term. We can, in fact, at 
once apply it to remove the apparent contradiction involved 
in the principle just stated. 

There can be no doubt that it is incorrect to state that Profits of 
there is a tendency for the profits of different trades to be fl^^l^J^^^ 
equalised ; there is no such tendency. The circumstances not tend to 
of various trades are intrinsically different — one business, J^^^i^ 
as we have before remarked, may be a more hazardous 
speculation than another, and the trader who incurs this 
greater risk must be compensated by permanently higher 
profits; these higher profits, therefore, denote a real com- 
pensation, not a casual or temporary disturbance, and there 
is no tendency whatever to abolish the compensation by 
equalising the profits of the more hazardous trade with 
those of the less hazardous one. But if, by some disturb- hut to rcacn 
inff cause, the profits of a business rise or fall below that '^^"«^"j'<'""'' 

. ^ . Tate of 

point which we have described to be their natural amount, profit. 
a tendency at once is brought into operation to restore the 
equilibrium, and to make the profits return to their natural 
amount; this is the equalising tendency which affects 
profits, for there is no tendency to cause a uniform rate of 
profit to prevail in different trades. We will describe the 

n2 



k 



i8o 



Manual of Political Economy. 



Example. 



The 'profits 
of the cotton 
trade when 
unusually 
raised 
tended to 
sink. 



The manu- 
facturers 
woidd 
borrow 
more 
capital, 



mode in which this equahsing tendency acts, both when 
the profits of trade rise above their natural amount and 
when they fall below it. 

First, let us consider an example of a rise. During the 
years 1859 and 1860, the cotton trade was in a most 
flourishing condition; cotton spinners realised far larger 
profits than other manufacturers. The cause of this active 
trade was an abundant cotton crop in America, and an 
unusually large demand for cotton goods in the East. 
The American civil war has quickly destroyed this sudden 
prosperity; a deficiency in the supply of raw cotton has 
thrown a gloom over the manufacturing industry of 
Lancashire ; ^ut if the American difficulties had not oc- 
curred, the profits of the cotton trade could not have 
continued to be what they were during the years 1859 
and 1860. Profits were then suddenly raised greatly above 
their natural amount; they would, in the course of time, 
have inevitably been restored to their proper level by 
the competition of capital. In the first place, the large 
profits realised by the manufacturers would induce them 
to extend their trade as much as they possibly could; for 
they would know that, as long as the manufacture con- 
tinued so thriving, their capital would not realise such 
large returns in any other investment. They would, there- 
fore, be naturally anxious to withdraw capital from other 
investments, for the purpose of employing it in their own 
business. In a country where capital is so rapidly accu- 
mulated as it is in England, large amounts of capital are 
always available, if an eligible investment is offered. The 
transactions connected with the borrowing and lending 
of capital are carried on by bankers, stock-brokers, and 
bill discounters ; all these are men of great acuteness and 
practical ability, who are ever ready to avail themselves of 
the slightest advantage which any particular investment 
may offer. When the profits of a manufacturer are ex- 
tremely large, he considers that it will repay him to extend 



Profits. 1 8 1 

Lis business to its utmost possible limits, by applying to a book ir. 
banker, or discount-broker, for loans. In such prosperous v_£!!;_l_^ 
times, he can offer favourable terms for these loans, and 
they are readily granted to him ; and thus there is scarcely 
any practical limit to the amount of capital which may be 
suddenly brought into a trade, when it is in an exception- 
ally prosperous condition, and when its profits conse- 
quently rise above their natural amount. Such a sudden which 
accession of capital may operate, in two distinct ways, to IT" 27' 
reduce profits. In the first place, there will be an increased in two 
demand for the raw material, and the raw material will ^"'^^' 
consequently rise in price. Now it is a well-known fact, 
that a manufacturer is not immediately compensated for an 
increase in the price of the raw material by a correspond- 
ing rise in the price of his manufactured goods ; consequent- 
ly, the profits of the trade will be reduced if the anxiety to 
extend a particular manufacture, when trade is good, causes 
such an increased demand for the raw material that its 
price is raised. But as the manufacture is thus extended, 
the supply of goods would be largely increased, and will 
soon become perhaps even more than sufficient to meet the 
demand. The cause which has mainly produced the pro- 
sperity and large profits of the trade will then cease to 
exist; for if the supply exceeds the demand, high prices 
will be replaced by low ones, and the profits of the trade 
will be quickly reduced. We cannot discuss at greater 
length the effect which is produced on prices by such an 
alteration in the supply of, or demand for, a commodit}^ 
as that we have just noticed, without anticipating the 
subject of 'value,' which will be discussed in the next 
division of this work. 

There is, however, another equalising influence which and more 
^vill be brought into operation if the profits of any par- ^"'^^'j^f> 
ticular business continue long to exceed their natural attracted 
amount. Suppose the profits are not reduced in ^^'^^{radef^^^^' 
manner we have described, by those who are engaged in 



1 82 Manual of Political Economy. 

the trade bringing more capital into it, then others occu- 
pied in less profitable employments would naturally be 
attracted to this thriving trade. A similar influence to 
that we have above described, to reduce profits, will be 
thus brought into operation; there would be a greater 
competition for the raw material, and an increased supply 
of manufactured goods will lower those higher profits, 
upon which the exceptionally large profits of the trade 
have depended. But it would be very erroneous to con- 
clude that the equalising tendency we have described is 
Taem instantaneous in its operation. Augmented supplies of 
^cmddlalce ^^P^^^^ ^^J ^^ quickly brought into any particular trade, 
place slow- but the trade cannot suddenly be extended beyond certain 
^' limits. During 1859 and 1860 every cotton mill in 

Lancashire was probably producing as large a quantity of 
manufactured goods as it possibly could; the existing 
machinery was worked to its utmost, and however large 
might have been the supply of capital, the quantity of 
goods manufactured could be increased in no other way 
than by creating new mills. But the construction of new 
mills and new machinery requires time, and during this 
time those engaged in the manufacture can take full 
advantage of the high profits. These considerations, how- 
ever, suggest another circumstance which very materially 
reduces the high profits that prevail in times of active 
trade. For, with regard to the prosperity of the cotton 
trade which we have been just describing, it appears that 
every cotton mill is very soon producing its maximum 
quantity of manufactured goods; and that, therefore, this 
quantity could not have been increased unless new mills 
and machinery v/ere erected. But people would be dis- 
inclined to do this unless they thought the prosperity of 
the trade was due to permanent causes, for before the new 
mills would be ready to commence work a reaction might 
very probably occur, and the trade might become de- 
pressed. It is, therefore, evident that only a small portion 



Profits. 183 

of the additional capital which is attracted to a trade, when ^°ok "• 
its profits are exceptionally high, is in the first instance ^ — I— ^ 
employed either in the purchase of machinery or in the 
erection of new buildings. Hence the principal part of this 
additional capital is employed as circulating capital, or, in 
other words, is paid away in wages; the employers of the 
trade, in fact, compete with each other for labour. It has, «"c? loowld 

. . at -first 

however, been pointed out, in the last chapter, that the ^.^^^se the 
skilled labour which a particular industry requires cannot ''^^^ <>/ 
be suddenly increased by engaging labourers who had ^;^g i^^de 
been accustomed to other occupations; consequently, the ^^^.^^i^^^* 
additional amount of circulating capital which is attracted 
to a trade by the high profits is chiefly employed, not in 
obtaining labourers from other branches of industry, but 
in raising the wages of those who are already engaged in 
the trade. Such a rise of wages must, however, exert a 
direct influence to reduce profits. We have, therefore, 
shown, that a rise in the price of raw material, a constantly 
increasing supply of goods, and an advance in wages, are 
three circumstances which are sure to reduce the profits 
of a particular trade, when its profits are exceptionally 
high. These reducing tendencies not unfrequently con- 
tinue so long, that the profits of a trade are ultimately 
reduced below their natural amount; in fact, it may be 
often observed, that activity of trade is regularly succeeded 
by a corresponding depression. When, however, a trade is 
so depressed that its profits fall below their natural amount, 
then equalising tendencies are brought into operation, and 
raise the rate of profit; these tendencies we will now 
proceed to describe. 

Let it be supposed that a trade has been affected b}^ ^^'^ ^^o"- 
adverse circumstances, a^nd that its profits are reduced 
below the natural rate. In the autumn of 1862, the time 
at which these pages were written, the cotton trade was 
in an extremely depressed state. The price of raw cotton 
had risen so much, in consequence of the American civil Profits 



1 84 Manual of Political Economy, 

BOOK II. war, that it was almost impossible, without incurring loss, to 
. cH. ^ v. ^ manufacture cotton goods at the prices they now realise. 
depressed In fact, it would be perhaps advisable for manufacturers to 
heloio the close their mills, were it not for the sufferings which would 
rate tend to be entailed upon the operatives ; and the machinery is 
''^^^' also greatly impaired by being for any considerable time 

disused. Under such circumstances, it is the interest of the 
manufacturers to contract their business; some mills are 
consequently closed, and great numbers work short time. 
The supply of cotton goods is greatly diminished, a tend- 
ency to a rise of prices is produced, and profits will be 
gradually restored to such amount as again to make the 
manufacture remunerative. In fact, manufacturers follow 
a directly opposite course from that which is pursued 
when the trade is thriving; in the latter case, everjrthing 
is done to increase the capital applied in the business ; but 
when trade is bad, Qperations are restricted, capital is with- 
drawn, less is paid in wages, and new mills are not erected. 
If, however, this country should for a length of time be 
deprived of a supply of raw cotton from America, then the 
cotton trade will suffer a more permanent depression, and 
a set of consequences will ensue different from those which 
occur when trade is depressed by some temporary cause. 
Case of tie The circumstances, However, which have thrown the 
sdh trade, cotton manufacture into a state of stagnation, are so 
exceptional, that it will perhaps be more advisable to 
illustrate our remarks by considering the present condi- 
tion of the silk trade in this country. It is supposed, by 
some, that the French possess natural advantages for the 
manufacture of silk, greatly superior to those of ou:r own 
country. It is, for instance, said that, owing to the clear 
atmosphere of France, the silks assume a finer colour than 
those which can be produced in England. The French, it 
is also maintained, show greater taste in these finer manu- 
factures. We believe that these pretended advantages 
have been greatly exaggerated, and that England will be 



Profits. 185 

able to compete with France, even in the manufacture of book it. 

silk. But there is no doubt that, at the present time, > [—^ 

French silks are considered to be superior to English 
silks. The conseqvience has been, that since the Budget 
of Mr. Gladstone in 1860 admitted French silks duty 
free, the English silk trade has been greatly depressed, and 
its profits have been reduced below the natural rate. Let 
us inquire what will occur if the supposed superiority 
of French silks is permanently maintained. The Eng- 
lish silk trade will continue to be depressed; but the 
question arises. Will the profits of this trade remain, there- 
fore, constantly below their natural rate? It is impossible 
that such should be the case, for manufacturers will not 
continue an industry from which they realise less profit 
than in any other branch of trade. Silk manufacturers 
would, therefore, under the circumstances assumed, remove 
their capital as quickly as possible from this trade, and 
employ it in some other more remunerative way. The 
transfer cannot be made suddenly; it will require a con- 
siderable time, and must cause great loss to the manufac- 
turers. All the fixed capital employed in the silk manu- 
facture, such as machinery and buildings, cannot be 
adapted to other industrial purposes without involving a 
large outlay. The manufacturers, too, will not readily 
submit to the change ; they will struggle with the adverse 
circumstances for a considerable time. No man, even in- 
dependently of the pecuniary sacrifices involved, would 
willingly change a business to which he has been accus- 
tomed, and in which he has acquired a skill, for one to which 
he would be a stranger. A trade therefore, if its profits 
were permanently reduced below their natural amount, 
would, after a certain time, be entirely relinquished, and 
individuals engaged in the trade might be severe losers; 
but as we shall prove, when discussing the principles of 
international trade, no injury would ultimately be inflicted 
upon the community in general. 



1 86 Mamial of Political Economy, 

BOOK II. Having remarked upon the equalising tendencies wliicli 



CH. V 



preserve the profits of each department of industry at a 

Causes certain relative amount, which we have designated as the 

(julate the i^^tural rate of profit, we shall next proceed to consider 

generalrate the causes wliich regulate the general rate of profit which 

' ' prevails throughout the country at any particular time. 

Now it has been previously stated that the general rate 

of profit is higher at one time than at another, and that 

very different rates of profit prevail in different countries. 

Staiement If ^e take the case of any manufacture as an example, 

rate of i^ is quite manifest that the produce is shared between 

profit de- f]^e employer and the employed ; or, in other words, be- 

pends upon pi t • 

toages ex- tv/een pronts and wages, in any given case, the more the 
anuned. employer receives, the less will be left for the employed; 
or, in other words, the more is taken in the form of profits, 
the less will be given in wages. If wages take a larger 
share of the produce, profits must take a smaller share. 
Suppose, however, that industry, by the introduction of 
new machinery, is rendered more productive, there will 
then be a greater quantity of produce to be distributed, 
and more may be apportioned to profits, without the 
slightest reduction in wages. But, although the amount 
of wages received might remain the same, yet it has been 
custom.ary for political economists to say, that the rate of 
wages vfould be altered; for they conceive that the rate 
of wages is determined by the ratio which wages bear to 
profits. Ricardo employed the expressions, 'rate of wages,' 
and 'rate of profit,' to explain merely the terms of a ratio, 
and he would have said, that even if wages were reduced 
one half in amount, the rate of wages and the rate of 
profit would have remained unaltered, supposing that the 
I'eduction in wages was accompanied by a corresponding 
reduction in profits. Ricardo seemed to rejoice in a sur- 
prising paradox, and the paradox was often created by 
using language the meaning of which was somewhat 
obscure. Ricardo and others have asserted, that the rate 



Profits. 187 

of profit depends upon wages. This, if properly under- eook it. 

stood, is no doubt true ; and profits may be defined to be l-L^ 

the surplus which remains after the capital has been re- 
placed which has, directly or indirectly, contributed to the 
production of wealth. The proportion which the surplus 
bears to the capital which has been so expended deter- 
mines the rate of profit. If the expenditure of a certain 
quantity of capital produces an amount of wealth equal to 
three times its value, then the surplus which remains, after 
the capital expended has been replaced, will equal twice 
the value of this capital ; and, therefore, the rate of profit 
will, in this case, be two hundred per cent. But when we 
speak of capital being expended in the production of 
wealth, let us enquire how it is expended. A great portion 
of it is paid away directly in wages, the remainder is spent 
in purchasing materials or machinery; but even when 
such a material as coal is bought, the money with which 
it is purchased may be regarded as indirectly devoted to 
paying wages, for the money for which coal is sold pays 
the wages of all those who have contributed to raise it. 
The capital, therefore, which is applied to the production 
of any commodity is expended, either directly or indi- 
rectly, in wages. The rate of profit, as we have just re- In wnat 
marked, depends upon the ratio which the whole produce J'f"^'^ ^^ ''^ 
raised bears to the capital expended in raising this 
produce ; and, since this capital is expended in paying 
wages, Ricardo and others have stated that the rate of 
profit depends upon wages. Such a principle, however, 
is useless, without the kind of explanation we have 
given ; the principle, moreover, is not correct, unless the 
terms in which it is expressed are modified. For if 
labour is rendered greatly more efficient, either by better 
education, by superior management, or by improved 
machinery, more produce will be raised by the appli- 
cation of the same quantity of labour. The same capital 
may be expended, or, in other words, the same amount 



•«e. 



i88 



Manual of Political Economy, 



Correct 
statement 
of the prin- 
ciple, viz. 
thattherate 
of profit 
depends 
vpton the 
cost of la- 
bour. 



may be paid away in wages ; but, in consequence of the 
superior efficiency of labour, more will be produced. A 
greater amount, therefore, will be left to be apportioned 
to profits ; and thus the rate of profit will be increased, 
whilst wages will remain unaltered. This is in direct 
contradiction to Ricardo's principle, that the rate of profit 
depends on wages ; and, therefore, this principle is not 
correct, unless it is assumed that the efficiency of labour 
is a constant quantity. 

Mr. Mill has shown that the correct way of stating the 
principle is, that the rate of profit depends on the cost of 
labour. The cost of labour is determined by comparing 
the wages the labourer receives with the amount of wealth 
which is produced by his labour. If, therefore, labour is 
rendered more efficient, the cost of labour is manifestly 
diminished, because either more produce is raised by the 
payment of the same amount of wages, or an equal amount 
of produce results from the expenditure of a smaller sum 
in wages. When labour is rendered more efficient, we 
have seen that the rate of profit will rise, although the 
same amount is paid in wages. Hence, if whilst each indi- 
vidual labourer receives the same remuneration, his labour 
produces more, the cost of labour is diminished ; thus the 
rate of profit depends upon the cost of labour, and not 
upon wages. From this principle some most important 
conclusions may be at once deduced. If anything occurs 
to render labour more efficient, profits will be increased, 
if it is assumed that the labourers receive the same wages 
as before. It also follows that, when labour becomes more 
efficient, the rate of profit, and also wages, may both be 
increased ; for profits must be increased if the rise in 
wages is not so great as to make the cost of labour more 
than it was before the improvement in the efficiency of 
labour took place. With regard to agriculture, it has been 
frequently stated that, as land diminishes in fertility, the 
labour which is applied to it will diminish in productive- 



Profits. 189 

ness. Twenty labourers working on poor land will not ^ook ir. 
cause as much produce to be raised as ten labourers -— ^^-^ 
working on more fertile soil. Unless, therefore, the agri- 
cultural labourers receive less wages, the cost of agricultural 
labour must increase ; or, in other words, the rate of profit 
obtained from farming must decline as it gradually be- 
comes necessary to resort to less fertile land. Let us Cost of ^ 

,,T ^ • < !• n J.^ • ± labour in 

apply these conclusions to explain some or those points j^ustralia 
in which the present economical condition of Australia <^'>^d Enj- 
contrasts so strongly with that of England. In enunciating 
Ricardo's theory of Rent, we have shown that, in each 
country, the poorest land cultivated can onjy pay a 
nominal rent. The present population of Australia is 
comparatively small, and yet her tracts of uncultivated 
fertile land are almost of boundless extent. The worst 
land which is cultivated in Australia is far more fertile 
than the worst land cultivated in England. Hence, 
agricultural labour, being applied to a more fertile soil, is 
far more efficient in Australia than in England. The 
same amount of labour which is employed upon the poorest 
farms in England would, if applied to any land which is 
cultivated in Australia, cause a great deal more produce to 
be raised. Hence, in consequence of the increased efficiency 
which is thus given to agricultural labour in Australia, the 
wages of agricultural labourers may be much higher in 
Australia than in England, and yet the cost of this labour 
in Australia may be less than it is in England. But if 
the cost of labour is diminished, the principle we have 
enunciated assures us that the rate of profit must be in- 
creased; and such a conclusion is amply verified in the 
case of Australia. Wages are far higher there than in 
England, and profits are also higher. This is abundantly 
verified by the fact that the current rate of interest is far 
in excess of that which prevails in our own country. There 
may appear to be a difficulty connected with the explana- 
tion we have just given ; for it may, perhaps, be said, the 



190 Manual of Political Economy. 

BOOK IT. agricultural labour which is applied to some of England's 

> 1 '.. most productive soils yields more than the same quantity 

of labour applied to even the best land in Australia. It 
may, therefore, be thought incorrect to say that agri- 
cultural labour is less productive in England than in 
Australia, since it would seem that only that portion of 
our agricultural labour is less productive which is em- 
The cost of ployed upon our least fertile soils. This ambiguity must 
raUaboiir ^^ cleared up ; for it can be shown, that the standard of 
is measuredihe cost of agiicultural labour is determined by the cost 
whlnav- ^^ ^^^* labour which is employed upon the least fertile 
]-)lied to the land in cultivation. Rent ma.y be regarded as a sum 
s7us in eld- which the farmer pays for the permission to employ labour 
tirafion. upon productive land. The more productive is the land, 
the higher, of course, is the rent; or, in other vv^ords, the 
more ' favourable the circumstances under which agri- 
cultural labour is applied, the greater is the sum which 
has to be paid as rent. Although agricultural labour 
employed on a fertile soil is, of course, more efficient, yet 
the farmer obtains no advantage from the cost of this 
labour being diminished, for what he would thus gain he 
has to pay away in rent; his profits, therefore, would not 
be diminished by an increase in the cost of labour, pro- 
vided that there v/as a corresponding reduction in his rent. 
The profits which are derived from agriculture approxi- 
mate to an equality, and it is still correct to say, even 
with regard to agriculture, that the rate of profit is 
determined by the cost of labour; if we bear in mind, that 
in this case the cost of labour is not entirely composed of 
wages, but also consists of rent, since rent may be re- 
garded as a premium paid when agricultural labour is 
assisted by a fertile soil. Considered in this light, therefore, 
the cost of agricultural labour may be regarded as uniform 
throughout the same country. But in the case in which 
the worst land cultivated is so poor that only a nominal 
rent is paid, then rent can no longer be regarded as an 



Profits. 191 

element of the cost of agricultural labour. And hence the 
proposition which we have above enunciated is proved, 
namely, that the general cost of agricultural labour is 
determined by the cost of that labour which is employed 
upon the least fertile land in cultivation. If, therefore, 
food cannot be supplied to an advancing population 
without continually resorting to less fertile land, then one 
of two consequences must inevitably ensue: either the 
cost of agricultural labour will increase, and then a decline 
in the rate of profit will follow; or, if the cost of this 
labour does not increase, the labourers must receive lower 
wages; for w^hen labour is applied to less productive land, 
an increase in the cost of this labour can alone be pre- 
vented by pajdng the labourers lower wages. 

We believe that sufficient has been stated to establish Variation 
the proposition, that the rate of profit depends upon the '^ ^-t^^^^! 
cost of labour. If, therefore, the rate of profit is higher in different 
in one country than in another, it must be because the ^''"*^^'''^^'- 
cost of labour is greater in one country than in the other. 
Let us enquire into the causes which regulate the cost of 
labour. If capital increases, without any increase in the 
number of the labouring population, it is manifest that 
there is a large sum to be distributed amongst them; 
wages will rise, and consequently the cost of labour 
will increase, and the rate of profit will diminish. If 
population increases, and capital remains stationary, wages 
will fall, the cost of labour will be diminished, and 
the rate of profit will advance. Hence it appears that 
not only the average remuneration of the labourers, but 
also the rate of profit, is primarily determined by the 
ratio between the capital of the country and the number 
of its labouring population. This, however, is not a com- 
plete explanation, for it would seem to indicate that the 
rate of profit is higher when wages are low; facts contra- 
dict this, for in Australia wages and profits are both 
higher than they are in England. But the ditEculty 



192 Manual of Political Economy. 

BOOK II. arises from confusing wages with cost of labour; wages 
^ ^^ \ ^' . may be very low, and yet the labour be so inefficient, 
Cost of from want of proper training or of physical strength, that 
labour not j^^ ^^g^ ^f labour may be extremely high. The English 

to be con- '' . 

founded contractors who made the French railways could have 
'With ivages. engaged any number of French labourers, at one half the 
wages that were paid to English navvies; but so superior 
is the physical strength of an Englishman, that it was 
proved that one English navvy would do as much work 
as two French labourers. In this case, therefore, the 
cost of French labour would be as great as the cost of 
English labour, although the wages of the English 
labourer were twice as great as those paid in France. 
Again; high wages do not always denote that a large 
remuneration is received by the labourer. Wages may 
be high, and food so dear, that a labourer is far better off 
in a country where wages may not be so high, but food 
cheaper. Hence labourers may be comparatively speak- 
ing impoverished, in consequence of the dearness of food, 
although their wages are high; in such a case the cost 
of labour would be great, and the result would be a low 
rate of profit, accompanied with the impoverishment of 
the labouring class. Such is the result which has to be 
feared by a country whose increasing population makes 
food dearer. The supplies of cheap food which have been 
poured into England since the introduction of free trade 
have produced as powerful an influence in sustaining pro- 
fits, as in promoting the comfort of the working classes. 

In a country where food is extremely cheap, wages 
niay be low, and the cost of labour small, and yet these 
low wages may be sufficient to give the labourer an abun- 
dant supply of all that he requires. Under such chcum- 
stances, the rate of profit would be high, and all the 
wants of the labourers would be amply provided for. This 
represents the condition of America, where food is cheap, 
the labourers well off, and the rate of profit, as shown by 



Profits. 193 

the current rate of interest, is higher than in England, book ii. 

CH V 

Hence, to quote an expression of Mr. Mill, it may be > — J— ^ 
said that 'cost of labour, and therefore the rate of profit, Cost of la- 
is a function of three variables :' rate of 

1. ' The efficiency of labour.' profit a 

2. 'The wages of labour' (meaning thereby the real{^^gg'^'*^*^ 
reward of the labourer). variables: 

3. ' The greater or less cost at which the articles com- 
posing that real reward can be produced or purchased.' 

If labour becomes more efficient, whilst the wages of 
the labourers and the price of food remain unaltered, 
the cost of labour will be diminished. If the wages of 
the labourers are reduced, whilst there is no change in 
the efficiency of labour and the price of food, the cost 
of labour will again be diminished. The cost of labour 
will also be diminished if the price of food is reduced, 
and the amount of the labourer's wages, estimated by the 
commodities they will purchase for him, remains unchanged. 
If, therefore, the cost of labour, or, in other words, the rate 
of profit, varies in different countries from time to time, the 
variations must be due to the influence of one or more of 
the three circumstances above enumerated. The current 
rate of interest affords a sufficiently sure evidence of the 
rate of profit, and it would be a most useful exercise for 
the student to attempt to trace to which of the three 
variables is due a high or a low rate of profit, which may 
happen to prevail in any particular country. In order to 
assist him in such an examination, we will indicate some 
of the leading causes upon which depend the efficiency of 
labour, the real wages of the labourer, and the price of 
food. 

We have, in previous chapters, described in detail the^^rs^, the 
causes which determine the productiveness of labour. We f^^'^^f^"'^^ ^"^ 
will here only add, that nothing more powerfully pro- which 
motes the efficiency of labour than an abundance of fertile Jw^? 
land. But an abundant supply of fertile land causes food wpow the 

o 



194 Manual of Political Economy. 

to be cheap, a^nd, under sucli circumstances, two out of 
the three causes are brought into operation upon which 
supply of depend a high rate of profit and a small cost of labour ; 
land^' ^^® influence which is thus produced in increasing the 
rate of profit, is so great, that in a country like Australia, 
where there is a large supply of fertile land, profits are 
high, although a labourer at the same time receives a very 
large remuneration for his labour. 
secondly, The second variable, upon which depends the cost of 
5^^^f/^^ labour — namely, the remuneration received by the la- 
wUch de- bourer — is determined by the ratio which population bears 
^ZrdZe ^^ capital. It would be foreign to our purpose to attempt 
increase of to describe why some countries are more populous than 
others. Our colonies and the American continent have 
not yet had time to be thickly peopled with an European 
population. We have in the last chapter remarked upon 
the power of man's multiplication, and we have mentioned 
that Mr. Malthus's 'Essay on Population' gives a most 
detailed and interesting analysis of the checks by which, in 
various countries, population is restrained. In England, 
whatever may be the other checks which restrain popula- 
tion, there is one which exercises a preponderating influence 
in determining the variations in the number of our labour- 
ing population. It has been satisfactorily proved that 
the number of marriages varies with the price of food, 
diminishing as food becomes dear, increasing as food 
declines in price. A great portion of the advantage 
which the poor would derive from the cheapening of food 
is therefore ultimately lost to them, because the increase 
of population which is stimulated by cheap food must have 
a tendency to lower wages, 
and capi' The causes which influence the accumulation of capital 
^' . are extremely various. Much depends upon national 
crease of character ; one nation may be far more prudent, and 
ItseUde- ^^^^ possess much more foresight than another; one 
pends upon nation may consume, in their own personal enjoyment. 



Profits, 195 



almost all the wealth they can obtain, whilst another saves book ii. 
everything which the most rigid economy will permit. No vJ^;_. 
nation will ever accumulate a large amount of capital for 
the ]Durpose of applying it to productive purposes, until 
there is sufficient social order to render property secure. 
Nothing has so powerfully impeded the industrial progress 
of India, and retarded the development of her great re- 
sources, as the social anarchy which has prevailed for so 
many centuries. If England's rule and England's power 
can make the people of India feel that the rights of 
private property will be strictly respected, then India will 
inevitably become a great commercial nation. But in- , 
dependently of any effects produced upon the accumula- 
tion of capital by these differences in the character and 
condition of various nations, it may be observed that the 
accumulation of capital is always influenced by the rate the rate of 
of profit. If, for instance, the current rate of interest ^^'^-^^ 
should be greatly increased in England, an additional 
inducement would be offered to every one to save, and 
the result would be strikingly exhibited by a greatly in- 
creased accumulation of capital. The amount of wealth, 
therefore, which is saved in a country is kept, as it were, 
confined between certain limits by a self-acting agency. 
For if in any particular year there should be some irregu- 
larity which should cause a much larger capital to be 
saved than is customary, the labourers would, in con- 
sequence of this augmentation of capital, receive higher 
wages, the cost of their labour would thus be increased, 
the rate of profit would diminish, and the current rate of 
interest would fall. In this manner less inducement 
would be held out for individuals to save, and a force, as it 
were, would be created to restore capital to its former 
amount. Sufficient capital might soon be accumulated in 
England to reduce the current rate of interest to two 
per cent. This was the current rate of interest in Holland 
at the end of the last century; the Dutch at that time 

02 



196 Manual of Political Economy. 

BOOK ir. were therefore content with two per cent., but the English 



CH. V, 



are not satisfied unless three per cent, can be obtained. 
and the The current rate of interest, therefore, to a great extent, 
national clepends upon national character ; for if the Eno^lish, as a 

character. r r -^ o ' 

nation, became more prudent, and more anxious to save, the 
current rate of interest might rapidly decline to two per cent. 
Thirdly, The effect which is produced upon the rate of profit by 
the cost of ^i^Q i^^^ of the three variables, upon which the cost of labour 
the real depends, has not generally been sufficiently considered. 
wages. Suppose an employer pays lOOOZ. in wages, the labourer 
spends the greater portion of these wages in purchasing 
food. We have ascertained that an agricultural labourer, 
with a family, consumes forty per cent, of his wages in 
purchasing bread; 400?. therefore, out of lOOOZ. paid in 
agricultural wages, is devoted to the purchase of bread*. 
Suppose, by some cause, such as the introduction of free 
trade, that the price of bread is reduced one-fourth ; a loaf 
before sold for Is. 4<d. now only costs Is. ; 300?. will 
purchase as much bread as 400?. did before the price of 
bread was reduced. The labourers therefore, w^ho amongst 
them received 1000?. in wages, will now be quite as well 
off if they only receive 900?. Their real wages will re- 
main unchanged, although their nominal wages should 
be reduced one-tenth. The cost of labour might thus, in 
A diniinu- consequence of bread being cheapened, be reduced one- 
tion of this -^q-j^^Ij without the condition of the labourer beino- in the 

cost will be ^ ' ^ ^ ^ 

heneficial slightest degree deteriorated. But the question may very 

emvlover ^ I'^asonably be asked, Will the employer be able to appro- 

aud la- priate to himself the whole advantage ? Is cheap food 

)mrer. ^lone instrumental in increasing the rate of profit? We 

shall be able to explain why this seldom or never takes 

place; the advantage is invariably shared by the employer 

and the labourer. When the cost of labour is diminished,] 

the capital previously existing can support an increased! 

* The labourer is supposed to earn 10s. a week, and to have a wife and 
two children; the price of bread being Is. the 81b. loaf. 



CH. V. 



Proji.ts, jgj 

amount of industry. In the example we have above given, book n. 
a farmer, in consequence of bread being cheapened, pays 
only 900/. in wages instead of lOOOZ. He, therefore, has 
100/. to spare. This he may apply in employing more 
labourers on his farm, or he may invest it as capital in 
some other undertaking. In either case, the labourers as 
a class are benefited by a proceeding which virtually 
increases the capital of the country, and, therefore, the 
demand for labour; but if this be so, their wages will be 
raised, and they will share with their employer the ad- 
vantage of cheap food. We may, however, suppose one 
purely imaginary case, in which the labourers would not 
be benefited by cheap food. If the 100/. which, in the 
above example, the employer saves by the cost of labour 
being diminished, is not saved as capital, but is spent 
upon the employer's own enjoyments, the labourer's wages 
will not be increased; for the capital of the country will 
be decreased in proportion to the diminution in the 
cost of labour. We say such a supposition is purely 
imaginary, for an increased rate of profit never makes men 
more extravagant; it in fact produces an opposite influ- 
ence, for it always most powerfully stimulates the accumu- 
lation of capital. 

We have now remarked upon the more prominent <^^'^- These lirht- 
cumstances which determine the rate of profit; much ^ii\\ ciples ivill _ 
remams to be said upon the subject of profits, which '^Qjiedinthe 
must postpone until the next book, when we shall treat chapters 07i 
of value and price; for it is impossible to trace the subject ' 
of profits, in all the ramifications of trade and commerce, 
without the guidance of those principles which we shall 
derive from the consideration of various topics connected 
Avith the exchange of wealth. 

Having now discussed the leading principles which ^'^^ ^^^ 
regulate rent, wages, and profits, we shall proceed to ^ci^piMcihh 
apply these principles to some special cases which possess ^^ ^^!^^ 
great practical interest at the present time. We are the 'cam. 




Manual of Political Economy. 

more anxious to do this, because a student can only be- 
come familiarised with the principles of political economy 
by employing them to solve the economical problems 
which are abundantly suggested by the facts of every-day 
life. We shall endeavour to show how the distribution of 
wealth is effected, when the landed tenure is different from 
our own; when wages are regulated by other causes than 
by supply and demand, and when industry is conducted by 
other combinations than those of employers and employed. 
We shall be thus led to enquire into the social and eco- 
nomical effects of peasant proprietorship, of metayer rents, 
and of the various landed tenures which prevail in India. 
We shall also examine the utility and practicability of the 
various remedies which have been resorted to to raise 
wages; we shall thus point out the influence which has 
been produced by strikes and trades' unions; finally, we 
shall describe the great results which may be anticipated 
from the extension of the recently established and rapidly 
developing cooperative societies. These societies unite a 
great number of small capitals, and combine the employer 
and employed in the same individual. 



199 



CHAPTER VI. 

PEASANT PROPEIETOES. 



W 



E have already warned the reader against the con- book il 
chision that the present system of landed tenure in v_^^' ^^' 



England is to be regarded as the type of that which prevails Different 
throughout Europe and the other civilised parts of the ^'^^^ ?^ 
world. A very considerable portion of the land in England tenure. 
belongs to the large estates of the aristocracy ; land is 
rarely cultivated by its owner. The farms in England are 
generally large, and are becoming larger ; they are almost 
entirely cultivated by hired labour; and, consequently, 
the produce of the land has to be distributed amongst 
landlords, farmers, and labourers. But the condition of 
England in this respect was, a few centuries since, very 
different. No class of men in our early annals occupied 
a more prominent or honourable position than the yeo- 
manry. Their praises have been sung by our greatest 
poets ; their sturdy independence on many occasions 
preserved the liberty, and proved the courage, of the 
English race. The tenant farmers of the present day 
differ essentially from the old yeomen of England, who 
were freeholders, cultivating the land which they owned. 
Their holdings were generally much smaller than those of 
the present day. In many continental countries, such as Peasant 
France, Norway, Switzerland, Italy, Belgium, Prussia, and proprwtors. 
some of the German states, much of the land is still 
possessed by small jproprietors, termed peasant proprietors, 



200 Manual of Political Economy, 

BOOK II. who cultivate the land which they own. A peasant pro- 
V — ^.^ — '-^ prietor frequently cultivates his farm entirely by the labour 
of himself and his family. In this case, land, labour, and 
capital are all supplied by the same individual ; he there- 
fore claims the whole produce of the land ; and rent, 
wages, and profits are merged together. The question as 
to the comparative advantages and disadvantages of culti- 
Differences vating the land by peasant proprietors has been, perhaps, 
as to the niore keenly discussed by political economists than any 
advantages other Subject. On the Continent, not only political econo- 
proprietor- mists, but practical farmers, are decidedly favourable to 
ship. peasant proprietorships ; they can of course watch the 

system in actual working, and are therefore in a much 
better position to judge of its effects than we who have 
now no opportunity of observing any considerable tract 
of land in England cultivated by peasant proprietors. 
English opinion is so strongly in favour of large farming, 
that we may naturally expect to find that our countrymen 
almost invariably express themselves antagonistic to a 
system of peasant proprietorships, which implies small 
farming. The system has, hoA\^ever, in England, two 
earnest champions, Mr. J. S. Mill and Mr. W. T. Thornton. 
Both of these writers have collected a great mass of facts 
bearing upon the subject, and have discussed these facts 
with the most perfect impartiality. Much of the oppo- 
sition which has been expressed by English writers towards 
peasant proprietors is undoubtedly due to a radical miscon- 
ception. Peasant proprietorships imply small farms, but a 
small farm cultivated by its owner differs essentially from 
a small farm rented upon a lease ; we believe that the 
whole advantage which can be attributed to peasant 
properties is almost entirely due to the fact that the culti- 
vator owns the soil which he tills. The well-known 
Arthur Young, whose preference in favour of large farming 
was most decided, has very happily said, ' Give a man the 
secure possession of a bleak rock, and he will turn it into 



Peasant Proprietors. 201 

a garden ; give liim a nine years' lease of a garden, and book it. 
he will convert it into a desert.' -^■J!i_ 

In a previous chapter, we have stated various reasons The advan- 
which incline us to the conclusion, that large farms are J^f^^J' j^' 
more productive than small farms, when land is cultivated large farm- 
not by its owner, but by a tenant*. This opinion is corrobo- ^g^allfarm- 
rated by the facts of every-day experience ; for there can be ing does not 
no doubt that the size of farms in England is increasing, |^^J^ j^^^^^_ 
rather than diminishing ; and the advantage of large farms ed proper- 
is sure to be more prominently shown, as machinery of an ^g^^^g^^/icm 
expensive character becomes extensively used in agriculture, small. 
We cannot suppose that small farms are being absorbed 
into larger ones, simply in consequence of the caprice of 
landlords; the absorption takes place, because tenants and 
landlords have alike learnt that a higher rent can be paid 
for a farm of six hundred acres, than for the same land 
divided into two farms of three hundred acres. But, 
although it can be proved that large farming is more 
productive than small farming, yet such a conclusion does 
not definitely decide whether or not a nation is benefited 
by a class of peasant proprietors ; for it has been already 
stated, that there is a fundamental distinction between a 
peasant proprietor and a small tenant farmer. Now we 
believe that very great social advantages are derived from 
peasant proprietorships; but before we enquire into this 
particular branch of the subject, we shall describe the 
economical effects which result from the cultivation of 
land by peasant proprietors. The question is in fact 
reduced to this — To what extent are the disadvantao-es 
which are associated with small farming compensated by 
the advantages which arise from the cultivator feeling that 
the land is his own? We will first make some general re- 
marks on the subject, and then substantiate our opinions 
by well-authenticated facts. 

Many of the inconveniences which belong to farming Inco7i. 

_ venieyices 

*SeeBookI., Chap. VI. 



202 Manual of Political Economy, 

on a small scale, exert a similar influence when an equally 
small farm is cultivated by a peasant proprietor. The 
of small want of proper machinery and implements is the most 
farming, formidable difficulty with which small farming; has to 

vjtiicri are . "^ ^ ° 

also appli- Contend ; and it may be observed, in England, that the 
cable to implements and stock of small farms are generally of an 

2yeasanf ... . . 

proprietor- inferior kind. A small farmer has not sufficient capital 
sitijps. promptly to take advantage of improved implements, and 
it often would not answer his purpose to make a consider- 
able outlay in purchasing a new implement, considering 
the comparatively little work it would have to do on a 
small farm. The expenses of a small farm are compara- 
tively much greater than those of a large one ; a flock of 
six hundred sheep may probably require only one shepherd, 
but six separate flocks of a hundred sheep each would 
certainly require six shepherds. A similar consideration 
applies to much of the other labour which is employed 
upon a farm; a farmer is obliged to spend the same time 
in going to a fair or market, whether he has 50^. worth 
of stock or corn, or whether he has 500^. worth to dispose 
of Farmers appreciate this, for it is proverbially said that 
small farms cannot compete with large ones, because the 
profits of a small farm are eaten up by expenses. A small 
farmer in England is generally occupied, partly in labour- 
ing himself, and partly in superintending the labour of 
others. Frequently he is efficient neither as a labourer 
nor as an overlooker of labour; and the want of industry 
in our small farmers has been often remarked. It must, 
however, be borne in mind, that both the large and small 
How these tenant farmer have no interest in improving the land; for 
vncon- ^£ capital is spent by a tenant farmer in improvements, the 

vemences ^ . . . 

are com- landlord, at the expiration of the lease, may appropriate 

'theTast ^^ ^^® whole advantage to himself by raising the rent. In 

case. England, therefore, the land must be improved, not by 

the cultivator, but by the capital of the landlord. English 

landlords have, within the last few years, appeared to 



Peasant Proprietors. 203 

recognise that profit can be realised by draining and other- book it. 
wise improving the soil, and embarrassed landlords can, as . ^^-J^- ^ 
we have before remarked, readily borrow capital for the 
improvement of the land by guaranteeing six per cent, on 
the amount borrowed, as a rent-charge for twenty-two years. 
But there are improvements of a more difficult and 
delicate kind, which, it appears, will never be carried out 
unless the cultivator is stimulated to the most watchful 
and untiring industry, by the feeling that the property 
which he improves is his own property. The testimony The magic 
of Arthur Young on this point is very valuable : — 'Leav- of property. 
ing Sauve,' says he, "^I was much struck with a large tract 
of land, seemingly nothing but huge rocks, yet most of it 
enclosed and planted with the most industrious attention. 
Every man has an olive, a mulberry, an almond, or a peach- 
tree, and vines scattered among them ; so that the whole 
ground is covered with the oddest mixture of these plants 
and bulging rocks that can be conceived. The inhabitants 
of this village deserve encouragement for their industry, 
and if I were a French minister they should have it. They 
would soon turn all the deserts around them into gardens. 
Such a knot of active husbandmen, who turn their rocks 
into scenes of fertility (because, I suppose, their own), 
would do the same by the wastes, if animated by the same 
omnipotent principle.' Again, 'Walk to Rosendal (near 
Dunkirk), where M. le Brun has an improvement on the 
Dunes, which he very obligingly showed me. Between 
the town and that place is a great number of neat little 
houses, built each with its garden and one or two fields 
enclosed, of most wretched blowing dune sand, naturally 
as white as snow, but improved by industry. The magio 
of property turns sand into gold.' 

Flanders affords the most striking example of the in- Evidence 
fluence produced by what Arthur Young so aptly terms ^^f^^'^^ur 
'the magic of property.' The farming both in East imd. properties 
West Flanders has long been celebrated j it is unsurpassed 



204 Manual of Political Economy. 

in Europe; for as Mr. M'Cullocli says, 'Its natural soil 
consists almost wholly of barren sand, and its great fer- 
derived tility is Entirely the result of very skilful management 
from the ^^^ judicious application of various manures.' Such a 
Flanders, tract of land, if owned by a landed aristocracy, would have 
remained a barren waste. It would be worthless to be 
rented by a tenant, and no labour which a landlord could 
have hired would have bestowed that unwearied and in- 
telligent industry which has converted barrenness into 
luxurious fertility. This ^ will become evident when we 
know the agency by which these improvements have 
been effected. It has been frequently remarked by those 
who have travelled through Flanders, that the Flemish 
agriculturists want nothing but space to work upon. 
Whatever the quality of the soil may be, in time they will 
Cultivation make it produce something. The sand in Campine is like 
dunes ' ^^^ sands on the seashore, of which they originally were a 
part; and here you see a cottage and rude cowshed 
erected on a most unpromising spot. The loose sand is 
held together in little mounds by the roots of the heath. 
A small spot being selected, is surrounded by a ditch and 
levelled ; it is then planted partly with broom and potatoes, 
and perhaps a small patch of diminutive clover, and 
manures both solid and liquid are collected. This is the 
nucleus from which, in a few years, a little farm will spread 
around. The only thing that will grow on this sand with- 
out manure is broom, and this will be sown if no manure 
can be got, and will in three years be fit to cut, when it 
is sold to bakers or brickmakers. The leaves falling en- 
rich the soil, and the roots give it a compactness; it may 
now be sown with buckwheat or rye without manure. 
When this is reaped, some manure may have been obtain- 
ed, and a course of cropping may begin. With the aid of 
clover and potatoes, a farmer may keep cows and make 
manure; the improvement will be so rapid, that in a few 
years the soil will become as mellow, retentive of moisture, 



Peasant Proprietors. 205 

and enriched by manure and the decomposition of vege- book ti. 
table matter, as soil which was originally good; and the > ^'^• J^'^- . 
crops produced by both soils will be more nearly alike at 
harvest, than is the case in soils of different qualities in 
other countries. The people who have achieved these 
great results in agriculture are principally peasant pro- 
prietors, and they labour so earnestly and so intelligently 
because the ground they till is their own.' The Flemings, Goodness of 
at a time when English apiculture was in a most back- :f '^^^^^'' 
ward condition, followed a most approved system of rota- 
tion of crops. The English farmer is generally a better- 
educated man than these small Fleming proprietors. He 
has money at his command, a far larger capital than they 
have, and therefore he is able to purchase superior imple- 
ments; but a competent authority has observed, 'that 
in the minute attention to the qualities of the soil, in the ■ 
management and application of manures of different 
kinds, in the judicious succession of crops, and especially 
in the economy of land, so that every part of it shall be 
in a constant state of production, we have still something 
to learn from the Flemings, and not from an instructed 
and enterprising Fleming here and there, but from the 
general practice'"'.' 

Authorities seem unanimously to agree upon the great Evidence to 
industry evinced by peasant proprietors, and thus peasant ^'^^ ^^^^ 
proprietors would appear essentially to differ from small Zurich, 
farmers who rent the land they cultivate ; for indolence is 
generally assigned as the fault of this latter class. Mr. 
Inglis was forcibly impressed with the wonderful industry 
of the peasant proprietors of Zurich. Mr. Laing, a tra- 
veller who, with singular acuteness, has observed the 
economy of various European countries, remarks, when 
speaking of Norway, the country where peasant pro- A'onray, 
prietors are most numerous, and of longest standing in 

See an article on Flemish Husbandry in the Farmers' Series of the 
Society for the Diifusion of Useful Knowledge. 



2o6 



Manual of Political Economy. 



BOOK TI. 
CH. VI. 



and 
France. 



Certain ob- 
jections to 
peasant 
jyj'oprietor- 
skip are 
obviated by 
the coopera- 
tion of 
labour as 
shown by 
the Nor- 
wegian 
■peasants. 



proportion to the population, 'if small proprietors are not 
good farmers, it is not from the same cause here which 
we are told makes them so in Scotland — indolence and 
want of exertion. The extent to which irrigation is 
carried on, in these glens and valleys, shows a spirit of 
exertion and cooperation to which the latter can show 
nothing similar.' Once more we will quote Arthur 
Young, who has most happily expressed the effect which the 
feeUng of property exerts in stimulating industry. Al- 
though Arthur Young often found great fault with the 
agriculture which he observed on some of the small 
properties in France, yet he remarks that what he saw in 
France 'proved that property in land is, of all others, the 
most active instigator to severe and incessant labour.' 
And this truth is of such force and extent, that I know of 
no way so sure of carrying tillage to a mountain-top, as 
by permitting the adjoining villagers to acquire it in pro- 
perty ; in fact, we see that in the mountains of Languedoc 
they have conveyed earth in baskets on their backs, 
to form a soil where Nature had denied it.' It has been 
often urged as an objection against small properties in 
land, that there are many important improvements which 
can only be carried out by a cooperation of labour and 
combination of resources, which, it is supposed, would not 
exist among small proprietors. For instance, it may 
be impossible to drain one isolated field, if those around it 
remained undrained; an outlet must be found for the 
water, and in this way the interests of an adjoining pro- 
perty might be affected. Again, in many countries the 
fertility, and consequently the value, of the land depends 
on irrigation. Any one who is acquainted with those 
works of irrigation which have converted many of our 
English valleys from almost useless swamps into the 
richest meadow-land, will no doubt have observed, that 
the most expensive of these works are not constructed for 
any particular field, but serve a large tract of country; 



Peasant Proprietors. 207 

Therefore it might be supposed that irrigation would book n. 
never be attempted, if it were necessary to consult the -.^^^;ZL. 
conflicting interests of a great number of small pro- 
prietors. Such a supposition is completely met by the 
testimony of Mr. Laing with regard to Norway, who 
assures us that, in many districts entirely occupied by 
peasant proprietors, irrigation is carried out to its fullest 
possible extent. Mr. Laing emphatically speaks, not only of 
the industry, hut also of the cooperation of labour, shown by 
the Norwegian peasant proprietors in irrigating their land. 
English T^Titers, whilst allowing that a small proprietor 
may cultivate his land with great care, have almost inva- Is the nett 
riably assumed that this kind of cultivation is more ^^^""^f ^^ 

. - IIP greater oit, 

suited to a garden than a farm, and hence it is frequently small j^ro- 
stated that farming by peasant proprietors is '^^'^<^^ ^ZTa's the 
more expensive than farming on a large scale. The gross? 
gross produce from small properties may be greater, but 
the nett produce, it is said, cannot be. Some continental 
agriculturists have, however, enquired into this subject 
with gTeat care, and their conclusions are worthy of atten- 
tive consideration. Amongst a great number of German 
writers whose opinions upon this subject coincide, we select Fvidenre of 
Albrecht Thaer, a writer on the different systems of agri- "^- ^'^''"'^'"^ 
culture, and who had, in some of his earlier works, ex- 
pressed himself very decidedly in favour of large properties 
divided into large farms. He says he is convinced 'that 
the nett produce of land is greater, when farmed by small 
proprietors, than when farmed by great proprietors or 
their tenants.' Mr. Kay, a most intelligent English writer, 
also affirms this. ' The peasant farming of Prussia, ^^^. /i^ay, 
Saxony, Holland, and Switzerland, is the most perfect and 
economical farming I have ever witnessed in any country.' 
But if the nett produce of land is increased when occupied 
by small proprietors, a large estate ought, of course, to be 
more valuable if it were divided amom^st several small 
proprietors. Upon this point, we obtained from M. 



2o8 Manual of Political Economy. 

Reichensperger some most valuable information, based 
upon personal observation, and upon the most accurate 
and M. statistical facts. He expresses a very decided opinion, 
Reiclten- j^q^ q^-^ \^^\^ the OTOss produce of any eriven number of 
acres held and cultivated by small or peasant proprietors, 
is greater than the gross produce of an equal number of 
acres held by a few great proprietors, and cultivated by 
tenant farmers, but that the nett produce of the former, 
after deducting all the expenses of cultivation, is also 
greater than the nett produce of the latter. He men- 
tions facts which seem to prove that the fertility of the 
land, in countries where properties are small, must be 
Rap'id in- rapidly increasing, and substantiates this opinion by prov- 
the value of '^"^^ that the price of the land which is divided into small 
small pro- properties in the Prussian Rhine provinces is much higher, 
and has been rising much more rapidly, than the price of 
land on the great estates.' This is the most conclusive 
testimony which can "be given in favour of small landed 
properties; it is in fact a practical and complete solution 
of the question, for upon this subject abstract reasoning 
will have little effect in convincing the great bulk of 
mankind. Even if a very strong case can be made out 
in favour of small properties, it will not convince a 
people like the English, who are accustomed to a different 
system ; they will naturally say — If small properties are 
more advantageous, an estate if divided would realise a 
larger price ; and therefore a large estate, whenever it was 
sold, V70uld inevitably be partitioned into a great number 
of small properties. The reverse of this, however, has 
Experience taken place in England; estates have not been more sub- 
of England, ^jiyi^jed, for it is Well known that within the last few 

years, in almost every district, a great number of small I 
properties have gradually been absorbed, a.nd combined 
into large estates; this apparently affords a very strong 
evidence that small properties are not in England eco- 
nomically advantageous. 



Peasant Proprietors. 209 

It has been sometimes erroneously imagined, that if a book ii. 
political economist describes the advantages which may ■ ^^^• ^^^- . 
be conferred upon a nation by the possession of a class of Obstacles to 
peasant proprietors, he must therefore be anxious to intro- ^J^ *?'*'^' ^ 

. . , . , , auction of 

duce small properties into a country like our own by some peasant 
compulsory measures. But those who are the most intelli- Proprietors 
gent advocates of peasant proprietorships desire no more land. 
than that the government should not endeavour to foster 
one system of landed tenure more than another. If there 
is no such interference, then the development of any par- 
ticular system would be spontaneous, and would prove its 
economical advantage. In England, many causes combine, 
not only to prevent the partition of large into small 
properties, but also to encourage the rapid absorption of the 
small properties, which were so numerous in former times. 
The conveyance of land in England is most cumbrous 
and costly ; the title to a hundred acres of land may often 
be proved at as little expense and trouble as the title to 
a single acre. The cost of conveying a small estate is, 
therefore, in proportion to its value, much greater than the 
cost of conveying a large one. The law of England per- Entails. 
mits land to be entailed to such an extent, that a landed 
estate can be settled upon an unborn child ; and hence a 
very considerable portion of the land of England is strictly 
hereditary property, and cannot be sold. This power of 
entail is defended, because it tends to preserve a landed 
aristocracy, since if our great landowners were permitted 
freely to sell their estates, a great number of those proper- 
ties which have belonged to the same family for many 
generations would quickly be dispersed. It is not here 
the place to discuss the general policy of land entails, but 
there is one effect resulting from them which is very 
apparent. Owing to the fact that entailed land can rarely f^^Ugf^jti 
be sold, only a small 2)ortion of the land of England can of entail 
properly be considered a marketable commodity. ^'^^^'^J price If 
other motives besides pecuniary gain prompt a keen land. 



210 



Manual of Political Economy. 



The price 
of large 
and small 
estates not 
a measure 
of their 
compara- 
tive jyower 
of pro- 
duction. 



desire to acquire land. The possession of a large estate 
confers upon a man mnch more social distinction and 
importance than the possession of an equal amount of 
wealth in some such investment as the funds. A large 
landed proprietor may almost claim some of the most 
highly prized of social honours : he becomes a county 
magistrate, and will probably, once during his life, be 
placed in the exalted position of high sheriff of his county. 
Landed property always confers considerable political 
influence ; the monied man therefore knows, that if he 
purchases a large landed estate, he or at lea,st some of his 
children will be lifted into a higher social position than 
they could ever hope to attain by the greatest success in 
commerce or trade. Moreover, the owner of land can follow 
those pursuits of a country life which are so thoroughly 
congenial to the tastes of Englishmen. 

All these advantages combine to raise the price of 
land, and, consequently, land returns a much smaller 
interest than any other investment. The price of land 
is also materially increased, because the law of entail 
so greatly limits the quantity of land which is brought 
into the market. Hence we cannot with certainty 
conclude that cultivation by small proprietors is com- 
paratively unproductive, because a large estate in Eng- 
land will realise a higher price, when sold as a whole, 
than when broken up into small properties. For the price 
which the estate, when sold as a whole, realises, is only 
partly due to the value of the land commercially con- 
sidered. The other advantages we have enumerated, as 
belonging to landed property, may of course be regarded 
as of pecuniary value, and therefore increase the price of 
land. There can therefore be no probability that any 
considerable area of land in this country will be cultivated 
by small proprietors, for some time to come. If a much 
larger quantity of land should at some future period be 
brought into the market, in consequence of the removal of 



Peasant FropiHetors. 211 

any artificial impediments upon the transfer of land, then book ii. 
the price of land would be regulated, much more than it is J^^l:^^ll_^ 
at the present time, by the same causes which determine 
the value of other kinds of property; it would then be 
demonstrated whether or not the productiveness of land 
is increased by its division into small properties. If its 
productiveness were so increased, land would in England 
realise a higher price when sold in small portions. We Fvih of a 
think it would be most pernicious to attempt to create a l^^^^^f 
class of peasant proprietors by compulsory enactments, inheritance. 
The law which in France compels the equal division of 
landed property amongst the children of a deceased parent, 
is a most unjust and mischievous interference with the 
rights of private property. The evils caused by such a 
law are far more serious than any which can be attributed 
to the opposite policy, encouraged by English law, which 
fosters the preservation of large landed estates. We con- 
ceive it to be most important that every system of landed 
tenure should have an opportunity of being freely tried 
and tested ; and a treatise on political economy could not 
be complete, unless it pointed out the advantages which 
other countries have derived from their land being culti- 
vated by small proprietors, a class once most numerous in 
England, but now rapidly passing away. 

. We cannot dismiss this subject without enquiring into Social 
some of the social effects which result from peasant pro- th^ EJjilsh 
prietorships, although such an enquiry may perhaps be system. 
considered more strictly to belong to social science, than 
to political economy. Even those who are most decided 
in their opinions as to the productiveness of England's 
industry, must feel that the condition of those who are 
employed in agriculture is most unsatisfactory; for there 
are few classes of workmen who, in many respects, are so 
thoroughly wretched as the English agricultural labourers. 
They are so miserably poor, that if they were converted 
into serfs to-morrow, it would be for the interest of their 

P2 



212 



Manual of Political Economy, 



Extreme 
'poverty of 
English 
labourers. 



This ex- 
treme 
poverty 
'produces 
extreme 
ignorance. 



employers to feed them far better than they are fed at the 
present time. In all those localities which may not happen 
to be contiguous to the manufacturing districts, ten shillings 
a week may be regarded as the maximum of agricultural 
wasfes durina: the winter months. A moment's considera- 
tion will show, that such wages are barely sufficient to 
supply the first necessaries of life. Meat cannot be 
tasted more than once a week, and those who have to exist 
on this scanty fare are more exposed than any others to 
the inclemency of our trying climate. Such wages will 
not permit the slightest provision to be made, either for 
sickness, or the feebleness of old age. Throughout a 
large agricultural district with which I am intimately 
acquainted, I know that the great majority of the agri- 
cultural labourers have not saved a single penny; to them 
a life of toiling, and incessant industry, can offer no other 
prospect but to drag out a miserable old age; for then 
they will either be paupers in the workhouse, or they must 
come, as suppliant mendicants, for parish relief But even 
the physical suffering which is associated with their poverty 
is not the worst feature of their condition; their ignorance 
is as complete as it is distressing. Improved schools, 
enormous educational grants, and a general zeal for in- 
structing the poor, have failed to educate the agricultural 
labourers. The reason of the failure is obvious, and it 
is difficult to suggest a remedy. When children leave 
school at eight or nine years of age, to become plough- 
boys, the little that has been learnt is sure to be forgotten; 
and the consequence is, that in many large agricultural 
villages, there is not one young man who can read suffi- 
ciently well to understand a newspaper. Parents may be 
accused of neglecting their children's welfare; but how can 
we expect those who are so miserably poor, and who are 
ignorant themselves, and know not the value of knowledge, 
to sacrifice the two shillings a week, that a child of eight 
or nine years of age may readily earn ? Other countries, 



Peasant Proprietors. 213 

no doubt, possess labourers who are equally poor, and book 11. 
equally ignorant; but the poverty and the ignorance is . ^^-J^- , 
heightened, when contrasted with the accumulated wealth 
and the vaunted civilisation with which it is surrounded. 
We make these remarks in order to show, that even if the 
system of landed tenure in this country is productive of 
wealth, yet that the distribution of this wealth is so un- 
satisfactory, that those whose labour is instrumental in 
producing it are miserably poor, and their life in every 
respect most unenviable. They have, in fact, to work with 
the regularity of machines, without hope that their con- 
dition will be improved. 

Let us now enquire whether the condition of an agri- Social 
cultural community is more desirable when the land is ^ff^'^^^ ^f 
owned and cultivated by peasant proprietors. 'BQioYQ 2)rQprktoT- 
quoting any special instances, we may mention that *^^^' 
the condition of a man who can enjoy the entire fruits 
of his own labour is in every respect superior to the 
condition of one who is simply a hired labourer, and who, 
consequently, has no direct interest in the work upon 
which he is employed. The faculties of the latter are never 
fully stimulated, his hopes are not excited by success, 
his energies are not called forth to contend with the 
difficulties and disasters to which every employment is 
liable ; his life is, in fact, one of dull routine. It may be 
said that he is spared many anxieties, with which the 
labourer who is his own master has to contend. But it is 
almost a truism to assert, that these cares and anxieties 
are the most valuable instruments of education, and that 
without them the human faculties can never be adequately 
developed. These general observations may be corrobo- 
rated by actual experience, at least in the case of an 
agricultural community. All writers on peasant proprie- industry of 
tors bear the most decided testimony to their incessant and ^'*^^^^*^''«- 
intelligent industry. In Switzerland, France, Flanders, 
and the Rhine-land, we are told that the small proprietors. 



214 Manual of Political JEconomy, 

BOOK II. who cultivate their own land economise their time with 
J^JUl^ the most scrupulous care; they earnestly strive to turn 
every half hour to the utmost possible advantage; they, 
work early and late, and their labour exhibits a watchful- 
ness, and a fostering attention, which is never acquired by 
hired labourers; magical is the influence which the feehng 
of property exerts, and truly indeed has it been said by 
Arthur Young, that it is potent enough to turn sand into 
gold, and convert a desert into a garden. So great is the 
industry of peasant proprietors, that some writers have 
alleged, that they are too industrious ; that they are, in 
Their pru- fact, too nluch engrossed in the business of life. But it is 
uies!^ ^^^'' ^'^^^ reference to the prudential virtues, that they offer the 
most striking contrast to our hired labourers. The worst 
paid workmen in this country are so thoroughly reckless, 
that they seldom show any foresight for the future ; and 
many, consequently, who are impressed with this fact, have 
maintained, that higher wages effect no permanent im- 
ivhicJi^ provement in the condition of the poor. They do not 
Ixcessare ^^^^ *^®^^ increased earnings, but spend their money 
preferable either in drink or luxurious living. And that this should 
llcHefs-^^^ be the case, can be a matter of no surprise whatever. 
ness. There is no effect of ignorance more certain, than an 

almost entire absence of foresight; and the life of a hired 
labourer can exert no influence whatever towards culti- 
vating any of the habits of prudence. His poverty is so 
great, that he, when he has the means, naturally indulges 
in somewhat better living; and even if he should, by dint 
of great sacrifice and exertion, accumulate a trifling amount 
of money, he very seldom has any eligible opportunity of 
investing these savings. No definite prospect is held out 
to him, that his savings will ever enable him to occupy a 
different social position. If a hired labourer saves twenty 
pounds, he has no chance of investing it as capital in some 
profitable employment; the only purpose to which he can 
devote it, is to place it in the savings bank, where he can 



Peasant Proprietoi^s. 215 

obtain something below the current rate of interest. How book ir, 
much more powerfully will prudence be stimulated, if a s_£!!:^Il_^ 
definite prospect is held out, that a labourer might in the 
course of time, by means of his saving, acquire a small 
landed property! The value of such an acquisition to the 
labourer is not to be estimated by the amount of wealth 
with which it enriches him. It makes him, in fact, a 
different man; it raises him from the position of a 
labourer, and calls forth all those active qualities of mind 
which are sure to be exerted when a man has the con- 
sciousness that he is working on his own account. 

These remarks are corroborated by the unanimous testi- Evidence to 
mony of the most competent authorities ; for it has been fhrlftiness 
re|3eatedly affirmed^ that peasant proprietors are invariably of peasant 
a most thrifty class, and so anxious are they to accumulate ^^^P'^^^^^'^^- 
capital, that the style of their living has often been errone- 
ously supposed to denote poverty, when it is simply a 
result of great economy. The advantage to be derived 
from saving is brought most distinctly home to them. A 
small j)roprietor knows, that if he can save a few pounds, 
he shall be able to have another horse or cow, or perhaps 
some new implement, and he is able clearly to foresee the 
profit which he shall derive from such a purchase. Let a 
man once feel how efficient the wealth which he saves may 
become in producing more wealth, and he is sure in future 
to exert himself actively to accumulate capital. Mr. Browne, 
Avho was a few years since the English consul at Copen- Denmarl: 
hagen, has made some most interesting observations with 
reference to the peasant proprietors of Denmark. He 
bears the most decided testimony to their thrift, and also 
to the superior comfort in which they live. Thus, he says, 
'The first thing a Dane does with his savings is to pur- 
chase a clock, then a horse and cow, which he hires out, 
and which pays a good interest. Then his ambition is to 
become a petty proprietor, and this class of persons is 
better off than any in Denmark. Indeed, I know of no 



2 T 6 Manual of Political Economy, 



BOOK II. people, in any country, who have more easily within their 
J^JUl^ reach all that is really necessary for life, than this class, 

which is very large in comparison with that of labourers.' 
Mr. Jones's A system of small landed properties has sometimes 

assertion -, -, •, ■, ... , , 

that pea- been condemned, because it is supposed to encourage a 
santpro-^ reckless increase of population. Upon this point the late 
^o7er^stimu- ^^' I^ichard Jones was most strong in his denunciation; 
latespopu- but although this political economist collected many most 
valuable facts, yet he was prone to make unsupported 
statements, and often called upon his readers to reject 
a theory, or to assent to some particular opinion, upon his 
own unsupported assertion. Mr. Jones says that the 
peasant proprietors are 'exactly in the condition in which 
the animal disposition to increase their numbers is checked 
by the fewest of those balancing motives and desires 
which regulate the increase of superior ranks, or more 
civilised people.' But he gives no reason for this opinion, 
nor does he attempt to support it by specific facts. Many 
other writers besides Mr. Jones have maintained that 
small landed proprietors must become gradually impover- 
ished, in consequence of the continued division of the land 
amongst the children of each generation. It is not unfre- 
q\iently assumed, that a man will marry directly he ac- 
quires a small landed property, a large family will have 
to be maintained, and that the father will be able, 
at his death, to make little or no provision for his nu- 
merous children, unless he either divides the land which he 
owns amongst them, or else leaves the land to one of his 
children heavily encumbered with annuities, to be paid to 
the rest. In order to disprove such suppositions, we will in 
the first place show that all a priori reasons would lead us 
to conclude that the acquisition of property will act more 
powerfully than any other circumstance to make a class 
prudent with regard to marriage; we shall, in the second 
place, adduce specific facts bearing upon the slow rate of 
the increase of population amongst peasant proprietors. 



Peasant Proprietors, 217 

The most casual observer must have remarked that the book ii. 
poorest classes in this country show the greatest impru- > — '^ — '-^ 
dence with regard to marriage. As a general rule, a man improba- 
does not marry, in the middle and upper classes, unless he ^f^^^.f 
believes that he shall, at any rate, be able to give his ment. 
children as s^ood an education as he has himself received, ^^^^^9y ^f 

o ^ .... "^^ upper 

and be also able to place them in a social position similar classes, 
to that which he himself occupies. The majority of men 
are accustomed to some particular style of living, and 
they generally refrain from marriage, if the increased ex- 
2:)enses of married life would compel them to live in a 
manner which would not give them, what has been aptly 
termed, 'their habitual standard of comfort.' But the 
very poor are not influenced by any such considerations — 
they are not restrained from marriage by a desire to pre- 
serve a certain standard of comfort. What standard of 
comfort could the miserable cottiers of Ireland have had? 
Those who are accustomed to poverty do not attempt to 
exercise any restraint with regard to marriage; and 
amongst such persons, population is only restrained by 
the great mortality which prevails amongst the very poor, 
and more especially amongst their children. But when 
a labourer becomes a small landed proprietor he is at 
once influenced by the same motives which render the 
middle and upper classes prudent with regard to marriage. 
A person in the middle classes appreciates the value of the 
position he occujjies; and he will not marry, if marriage 
will so impoverish him as to render it necessary for him to 
resign his position. A small landed proprietor must be 
quite as forcibly convinced of the superiority of his own 
position compared with that of a hired labourer; and he 
will be equalty careful not to marry, if he considers that 
the expenses of a family would force him to give up this 
position, and would compel him to sell his land, and return 
to the ranks of the ordinary labourer. We have, moreover. Direct evi- 
abundant evidence to prove that peasant proprietors are ^^*^^^' 



2i8 Manual of Political Economy. 

BOOK II* acted upon by these motives. Sismondi, perhaps mdre 

« L— 1- than any other writer, has been impressed with the evils 

Sismondi's which result to the poor from over-population, consequent 
opinion. ^^ imprudent marriages; and his strong advocacy of 
peasant-proprietorships is principally based upon the 
conviction that the system acts powerfully to restrain 
population. His testimony with regard to France is ex- 
tremely important, because in France the system of 
peasant proprietorship is put to the most severe test, by 
the operation of the law which forces the equal division 
of landed property. Sismondi says, ^ There is no danger 
lest the proprietor should bring up his children to make 
beggars of them. He knows exactly what inheritance he 
has to leave them; he knows that the law will divide it 
equally amongst them; he sees the limit beyond which 
this division would make them descend from the rank 
which he has himself filled, and a just family pride, 
common to the peasant and to the nobleman, makes him 
abstain from summoning into life children for whom he 
cannot properly provide.' 
Mr. Kay's Mr. Kay, who may always be relied upon as a most 
account of accurate observer, shows that the prospect of acquiring: 
iMid. landed property makes not only those who are engaged 
in agriculture prudent with regard to marriage, but also 
exerts the same influence upon the labourers who are em- 
ployed in the adjacent towns. Speaking of Switzerland, 
he says, 'In some parts, as in the canton of Argovie, for 
instance, a peasant never marries before he attains the 
age of twenty-five years, and generally much later in life ; 
and in that canton the women very seldom marry before 
they have attained the age of thirty. Nor do the division 
of land, and the cheapness of the mode of conveying it 
from one man to another, encourage the providence of the 
labourers of the rural districts only. They act in the 
same manner, though perhaps in a less degree, upon the 
labourers of the smaller towns. In the smaller provincial 



Peasant Proprietors. 219 

towns, it is customary for a labourer to own a small plot book n. 
of ground, outside the town. This plot he cultivates m ^__:_1^ 
the evenings, as his kitchen-garden. He raises in it vege- 
tables and fruit for the use of his family during the winter. 
After his day's work is over, he and his family repair to 
the garden for a short time, which they spend in planting, 
sowing, weeding, or preparing for sowing a harvest, ac- 
cording to the season. The desire to become possessed of 
one of these gardens operates very strongly in strengthen- 
ing prudential habits, and in restraining improvident 
marriagfes. Some of the manufacturers in the canton of 
Argovie told me that a townsman was seldom contented 
until he had bought a garden, or a garden and house, and 
that the town labourers generally deferred their marriages 
for some years, in order to save enough to purchase either 
one or both of these luxuries.' Mr. Kay also proves, by the 
most precise statistical facts, that the peasant proprietors 
of the Prussian Rhine-land are extremely provident with 
regard to marriage, the ordinary age at which people 
there marry varying between twenty-five and thirty years. 
Numerous other facts might be adduced, to prove that a 
system of cultivation by peasant-proprietors is in every 
respect most satisfactory in its social consequences. 

In contrast w^th these results, the effects of our own Effects of 
svstem of landed tenure may be correctly characterised in !!^L!^'!^„ 
the following manner. The land is owned by compara- trusted 
tively few great landlords ; it is occupied by tenants who ^f^^J^^g^lf 
have "sufficient capital to cultivate large farms, and the proprietors. 
labour is supplied by hired labourers, whose wretchedness 
is proverbial, and between whom and their employers 
there is none of that personal sympathy which can alone 
be secured by the feelings of common pecuniary interest. 
When the soil of a country is owned and cultivated by 
peasant proprietors, the efficiency of production is not 
interfered with; and we believe we have shown that the 
social and material condition of peasant proprietors is 



220 Manual of Political Economy, 

BOOK ir. most satisfactory. Our own history, at least, proves that 
• — ^-_L/ this class, formerly represented in this country by the 
ancient yeomanry, has ever been distinguished for its in- 
dependence and its patriotism. We are, however, ready to 
admit that all the tendencies of the present age increase the 
improbability that peasant proprietors can ever again exist 
in this country as a numerous class ; nor should we desire 
to attempt to create such a class by any compulsory means. 
But although a large area of land in this country is not 
likely again to be owned and cultivated by individual 
labourers, yet we believe, if land was owned and cultivated 
Possihie^ by associations of labourers, that all the benefits would be 
oPloopera- ^ecured, and that many of the disadvantages would be" 
tiyesocie- avoided, which result from the system of peasant pro- 
^^^^' prietorships. The rapid and successful extension of those 

cooperative institutions, which will be described in a suc- 
ceeding chapter, makes us confidently believe that many 
large farms in this country, at no distant day, will be 
owned and cultivated by associations of labourers. 

We have entered into rather minute details in our 
remarks on peasant proprietors, because the subject has a 
special practical interest at the present day. At the time 
Serfdom in we write these pages, the emancipation of the serfs in 
Russia is being rapidly carried into effect, and we think 
that no social change that has ever been introduced by a 
government is destined to be accompanied with more im- 
portant or beneficial results. The serfs in Russia are 
supposed to number about 22,000,000; their condition 
has for ages been that of semi-slavery. Each serf gene- 
rally occupies a small portion of land; and instead of 
paying the proprietor of the soil any rent, the serf was 
bound to give him a certain proportion of his labour, and 
to render him various other services. As long as the serf 
fulfilled his obligations, he had a claim to the plot of 
ground which he was accustomed to cultivate. The 
landed proprietor was, however, permitted to exercise upon 



Peasant Proprietors, 221 

the serfs much of the tyranny with which, in feudal times, book it. 
the lord oppressed his villeins. A Russian serf could not J^Z!—/ 
marry whom he pleased; labour was ruthlessly extorted 
from him by the stick and by other means of corporal 
punishment ; and a trivial offence, perhaps never properly 
investigated, would often consign a serf to perpetual Si- 
berian exile. The present Emperor of Russia seems de- 
termined to make every Russian serf a free labourer. 
This noble resolution has not, in our own country, received Import- 
the praise it deserves. If the Emperor Alexander can ^^^^j^^^. 
successfully carry out this great work of emancipation, he Hon. 
may justly claim to be considered one of the greatest 
benefactors of mankind. 

It is, no doubt, impossible to frame any scheme oi Difficulty 
emancipation which would give equal satisfaction to the aJl^Zt 
landed proprietor and the serfs. A serf, directly he isi^^^^'o^ 
declared a free labourer, seems to consider that the plot of 
land he has been accustomed to cultivate becomes his own 
private property; that he is entitled to cultivate it with- 
out the payment of any rent; and that he is entirely re- 
leased from all his obligations to the landed proprietor. 
The landed proprietor, on the other hand, affirms, that all 
the land occupied by the serfs is his own property; and 
he maintains, that he gives permission to the serfs to 
cultivate some of his land, in exchange for their labour; 
he therefore says, if you deprive me of every claim to 
their labour, they can have no right to occupy my land, 
and it becomes entirely my own property. The Russian 
Government has, no doubt, striven to act in this matter 
with the greatest possible fairness; and we consider that 
no better or more equitable scheme of emancipation can 
be framed than the one which is likely to be adopted. 
According to this scheme, each Russian Serf will obtain as 
his own property, not the whole, but two thirds of the plot 
of land which he has been accustomed to cultivate; and, 
consequently, each Russian serf seems destined to become a 



222 Manual of Political Economy, 

BOOK II. peasant proprietor. The majority of English writers look 
' — ^^— ^ with dismay on a scheme of emancipation which would 
Prospect of lead to such results, because in our own country it is 
sion of serfs generally believed, that peasant proprietors inevitably be- 
tntopea- come miserably poor themselves, and are sure to bring 
prietorl' "^^^ ^^^^ i^**^ ^ Wretched state of cultivation. An able 
writer in the 'Times,' who' during April 1862 contributed 
four most interesting articles on the emancipation of the 
Russian serfs, appears to consider that all the political 
economists of Western Europe are hostile to the establish- 
ment of peasant proprietorships ; and he confidently states 
that the principles of political economy have proved, that 
this system of landed tenure is disastrous both in its 
social and economical results. We have therefore been 
desirous to show, in this chapter, that some of the most 
eminent political economists have expressed themselves 
most favourably towards peasant proprietorships, and they 
at least will not consider that a scheme of emancipation 
ought to be condemned beca.use it converts the Russian 
serf into a peasant proprietor. 



2 2"* 
*" ■** o 



CHAPTER VII. 

METAYERS AND COTTIERS. 

AVERY considerable portion of the land of Europe is book it. 
cultivated by metayers, and nearly the whole of the . ^^-J^'- , 
soil of Ireland before the famine in 1848 was occupied by Theme- 
cottier tenants. A metayer, as the name implies, originally ^^2/^^ ^V^- 
occupied the land on the condition that the landowner * 
should receive one half the produce as his rent. The name 
is still preserved, although the terms of this tenancy have 
been much modified. Almost the whole of Tuscany is 
cultivated by metayers, who pay the landlord two thirds 
of the produce as rent ; a metayer tenancy therefore now 
signifies, that a certain fixed portion of the produce should 
be paid as rent. Whether this portion should be one half, 
two thirds, or any other amount, seems chiefly to be regu- 
lated by the customs of different countries. Those who 
are only acquainted with English agTiculture find it diffi- 
cult to imagine the great extent of land which is cultivated 
by metayers. Before the revolution of 1790, nearly the 
whole of the land of France was rented by metayers, and 
even at the present time scarcely any other system of 
landed tenure is known in Piedmont, Lombardy, Tuscany, 
and other parts of the Italian peninsula. 

The cottier tenure is so anomalous that it is not easy The cottier 
to characterise it in a brief description. We may however ^^^ 
say generally, that a landlord takes from a cottier in the 
form of rent the utmost possible amount. The cottier has 
only in fact left to him the means of bare subsistence. 



224 Manual of Political Economy. 

BOOK IT. Cottier rents are nominal in pecuniary amount. These 

< — ^>. — ^ rents are in fact fixed so high, that it is impossible for the 

cottiers ever to pay them. The nominal amount of the 

rent far exceeds the whole produce which the land would 

yield. These tenants, therefore, are perpetually in arrear, 

and this gives the landlord the means of appropriating to 

himself the whole advantage of any unusually good crops. 

Compari' We have classed metayers and cottiers together, because 

dottier and ^^^ Same disadvantages in part belong to these two systems 

metayer of landed tenure ; but the results which arise from these 

tenures offer in many other respects a striking contrast. 
The me- The metayer tenancy illustrates in a very remarkable 

tayer system ,^ , i i • ^ ■ , ,'a' 

exhibits the Hianner the control which custom exerts over competition ; 
control of {qj. ij^q f^^^ ^^^^^ metayer tenure prevails throucjhout a 

competition ,.,.,. , i n i -j? 

by custom. Country plainly indicates that many landlords sacrmce 
their own interests, in order to obey a custom ; since it can 
be readily shown, that the rent of land, if regulated by 
competition, would in the majority of cases greatly exceed 
the metayer rents which are paid. And this will be truo 
whatever may be the portion of the produce at which the 
metayer rents are fixed ; for instance, in Tuscany two 
thirds of the whole produce is apportioned to the landlord. 
This is probably the highest metayer rent which is paid. 
The fertility of the soil of Tuscany must be such, that one 
third of the produce which is yielded by any land which is 
cultivated suffices to pay the expenses of cultivation, and 
also remunerate the tenant for his labour. If one third of 
the produce was not sufficient to do this, the land would 
be cultivated at a loss ; since we suppose two thirds to be 
allotted to rent ; and it would be impossible for the tenant 
to obtain a livelihood. But if one third of the produce 
yielded by inferior land is sufficient for the purposes we 
have just mentioned, then it is manifest that one third of 
the produce yielded by more fertile land would more than 
suffice, according to the rate of profit current in the 
country, to remunerate the tenant for the capital he 



Metayers and Cottiei^s. 225 

expends, and for his labour of superintendence. But when book it. 

rents are regulated entirely by competition, a farmer can- . '-J^ll^ 

not hope to obtain more than the average rate of profit, 
and, in such a cas*e, the farmer who cultivates fertile land 
is not in a better position than a farmer who occupies land 
of inferior fertility. The landlord is able to appropriate 
to himself the whole advantage of the increased fertility, 
since, when rents are regulated by competition, they are 
adjusted in proportion to the fertility and other advantages 
which a particular farm may possess. When, therefore, Diferevt 
metayer rents are paid, the tenants who happen to occupv ^''^-^^'^ ^-^ 

J r ' ^ jrr i j farmers 

the most fertile land possess, as it were, a beneficial 
interest, and the amount of this beneficial interest is pro- 
portioned to the fertility of the soil. "We will illustrate our 
meaning by an example. Let us suppose there are two under ti/e 
farms, which vary greatly in fertility, but which are culti- '^and'^^^^^ 
vated by the application of an equal amount of capital, metaj/er 
Let this amount be 800^,, and let it be assumed that the ^'^^ ^^"^' 
farmers consider they are adequately remunerated for their 
labour and capital if they realise a profit of twenty-five 
per cent, or, in other words, 200^. Suppose, in the first 
place, that the rents of these two farms are adjusted by 
competition, and that the amount of produce yielded by 
the two farms may be estimated at 1800Z. and 1500^. 
respectively. If, therefore, the two farms paid rents of 
800?. and 500?. respectively, there would in each case be 
1,000?. left to the farmers; this would replace their capital, 
and leave them 200?., or a profit of twenty-five per cent, 
as a remuneration for their own labour and capital. These 
farms therefore, if the rents were regulated by competition, 
would pay rents of 800?. and 500?. respectively. We will 
now examine what would occur if these two same farms, 
cultivated by the same amount of capital as before, paid 
a metayer rent of one third the produce ; the produce from 
the two farms above supposed being 1800?. and 1500?., 
the metayer rents would consequently be 600?. and 500?. 

Q 



226 



Manual of Political Economy. 



respectively. The worse farm of the two therefore pays 
the same rent as before, but the better farm pays a rent of 
200?. less ; therefore the metayer tenant who occupies the 
more fertile farm would have a beneficial interest which 
might be estimated at 200?. per annum. In any special 
ca.se, the amount of this beneficial interest depends upon 
the productiveness of the land. The purport of this ex- 
ample has not been to prejudge the question, whether or 
not, under a metayer tenure, the landlords receive smaller 
rents, and the tenants aie better off than if they occupied 
the land upon a rack-rent. Such a question can only be 
determined by considerations upon which we will proceed 
to remark. But the object we intend the above example 
to serve is to show, that when rents are regulated by a 
custom which fixes them at a certain definite proportion 
of the produce, then the rent paid by the most fertile soils 
is less in excess of that paid by the least fertile than it 
Y\^ould be if both were let on rack-rent. 

The arrangements connected with the metayer tenure 
vary greatly in different countries. The landlord almost 
the metayer always supplies a portion of the capital. Sometimes he 
system. provides the stock, the tenant buying the seed and imple- 
ments. In Piedmont, the landlord pays the taxes, and 
repairs the buildings, and the tenant provides stock, imple- 
ments, and seed. According to Arthur Young, the con- 
ditions of the metayer tenure in France before the revolu- 
tion, were far more complicated and variable than at the 
present time. In Champagne the landlords commonly 
find half the cattle, and half the seed, and the metayer, 
labour, implements, and taxes: but in some districts the 
landlord bears a share of these. In Roussillon, the landlord 
pays half the taxes ; and in Guienne, from Auch to Fleurne, 
many landlords pay all. Near Aguillon, on the Garonne, 
the metayers furnish half the cattle. But the metayer 
tenures of all countries are controlled by the principle, 
that the conditions of the tenure are arranged according 



Various 
arrange- 
ments of 



Metayers and Cottiers, 227 

to an undeviating usage. Thus, if it is customary in Pied- book it. 

mont that the landlord should pay the taxes, repair the — 1^ '-- 

buildings, and receive two thirds of the produce as rent, it 
would be an unheard-of thing for a metayer tenant to have 
his rent raised to three fourths of the produce, or to be 
displaced from his occupation, because some other person 
offered the landowner a higher price for the use of the 
land. The whole tone of public feeling would prevent 
the landlord accepting such an offer; in fact, persons would 
be restrained from making the offer by feelings similar to 
those which prevent a barrister publicly announcing that 
he will hold briefs at one half the customary fees. Land 
is often retained for many generations in the same family, 
by metayer tenants; they almost regard the land as a 
patrimonial possession, because they believe that they will 
not be displaced from its occupation, and that the con- 
ditions on which they hold it will remain unchanged. 
Metayer tenants therefore may justly, in a modified sense, D'fcrence 
regard the land as their own property, and consequently ^^^^^J^^m 
to this tenure belong in part all those advantages which, and pea- 
as we showed in the last chapter, result from small pro- ^nrietors' 
perties when cultivated by their owners. We say these 
advantages only belong in part to the metayers, because 
many of those motives upon which depend the advantages 
of peasant properties only act with limited effect in the 
case of a metayer tenure. For instance, a metayer feels 
that he has a claim to only a portion of the fruits of his 
labour; if he is more industrious, and his land is made 
more productive, the landlord takes a portion of this 
increased produce, therefore the feeling of self-interest 
which stimulates the active and intelligent industry of the 
peasant proprietor cannot act with similar force upon the 
metayer. But there is a much more serious objection than 
that which we have just noticed. Under a metayer tenure, 
the land is almost sure to be badly cultivated, for the 
nature of this tenure opposes the application of capital, 

Q2 



2 28 Manual of Political Economy, 

eitlier by the landlord or by bis tenant. For instance, if 
the land is drained at the expense of a metayer landlord, 
whose rent is one third of the produce, the land is of course 
made more productive, but the landlord only secures one 
third of the increased produce; the remaining two thirds 
is gratuitously given to the tenant, who has borne none 
of the expense. If, on the other hand, the land was drained 
at the sole cost of the tenant, he, in a similar manner, will 
only obtain two thirds of the advantage ; the remaining 
one third would be gratuitously presented to the landlord. 
Inefficiency Whenever the metayer system is inefficient, it is no doubt 
f^stem^^^ principally due to this cause; in fact, the strongest oppo- 
gmerally nents of metayer cultivation most strenuously insist on the 
toantof gi'eat want of capital which it exhibits. This objection 
capital. may be, and is, no doubt, overcome in those countries 
where the metayer farming is most satisfactory; for when 
the application of capital is required, there is no reason 
whatever why the metayer landlord and his tenants should 
not equitably arrange between themselves the particular 
amount which each party should respectively spend. If the 
metayer rents were one third of the produce, then it might 
be equitably arranged that one third of the cost of such an 
useful improvement as drainage should be borne by the 
landlord, and the remaining two thirds by the tenant. 
The terms of the contract might be varied under different 
circumstances; the tenant ought not to pay so much, if 
there was any chance that his term of occupation would 
be limited. Arrangements similar to these are frequently 
made between English landlords and their tenants, when 
money is borrowed from the Land Improvement Companies, 
for the purpose of carrying out works of permanent utility. 
Although we have pointed out that a metayer might not 
have the same motive as a peasant proprietor has to im- 
prove the land by incessant industry, and by judicious 
application of capital, yet, on the other hand, it must be 
remembered that the labour of the metayer will be, in all 



Metayers and Cottiers, 229 

probability, much more efficient than that of our own 
agricultural labourers, who simply work for hired wages ; 
they have no interest in the work in which they are em- 
ployed, they have no motive but to work with just sufficient 
skill and regularity to avoid being dismissed. To them 
it is a matter of little moment whether their employer's 
profits are large or small ; the indolence and carelessness 
which are thus engendered cause a loss to an employer of 
hired labour which is rarely adequately appreciated. In 
metayer cultivation, little hired labour is employed. A 
metayer generally occupies no more land than he can 
himself cultivate with the assistance of his family. He 
therefore, far more than the hired labourer, is stimulated 
to be industrious, because the profits which his exertions 
produce are at any rate in part his own. 

The most contradictory opinions with regard to the Contraclk- 
results of metayer farming have been expressed by those ^^7 , 
who have observed it in various countries. These different aTmetayel 
results may, no doubt, be attributed to the particular ^^^^^^^'^^^ 

1-1 • 1 • J 1 1 , , T io variety of 

customs which prevail with regard to the metayer tenures cudoms in 
in different countries. Some of these customs have alreadv ^'^^^'^^^ 

, . -, T-rr 1 T 1 1 countries. 

been noticed. We believe that the efficiency of the 
metayer tenure depends on the extent to which the customs 
of a country facilitate the application of capital to the land. 
The efficiency of the metayer cultivation also, in a great 
degree, depends upon the security which the tenant may 
have that he shall not be disturbed in the possession of 
his holding. It is hopeless to expect that there ever can be 
good farming when the cultivator is a mere tenant at will, 
who is ever liable to have his rent raised in proportion to 
the improvement produced on the land by either his skill 
or his capital. The evil has been j)artly remedied in 
England by the leasing of farms at a rack-rent for a 
period of years which varies from seven to twenty-one ; 
but, even under this system, enterprise on the part of the 
farmer is much discouraged ; for it too frequently happens 



230 Manual of Political Economy. 

that his rent will be raised at the expiration of his lease if 
he has made his farm more productive. This evil is 
remedied by the metayer tenure ; for, as we have before 
remarked, a metayer tenant is seldom displaced, and a 
rent, which is fixed at a certain definite portion of the 
produce, gives the tenant a beneficial interest in the 
increased productiveness of the soil. We will now proceed 
to consider how far our general d priori remarks upon 
metayers are corroborated by the facts which have been 
derived from experience and observation. Most English 
writers on this subject, including Arthur Young, Mr. 
Mc Culloch, and Mr. Jones, have been unsparing in their 
denunciations of the metayer system ; they assure us that it 
causes the land to be wretchedly cultivated, that it deprives 
the landlords of half the rent they might obtain under 
a different tenure, and that it causes the metayers them- 
selves to be more impoverished and more wretched than 
Umatisfac- Ordinary labourers. But these writers have principally 
tory nature formed their opinions by observing- the condition of the 

oj metayer ^ . ° 

tenure in French metayers, French agriculture does not, however, 
'ranee. afford a fair test of the effects of metayer farming ; for it 
there labours under many disadvantages which do not ope- 
rate in other countries. Mr. Jones, for instance, supports 
his opinion by quoting Turgot ; but Turgot spoke of the 
country before the French revolution. Then the exclusive 
privileges of the French nobility exempted them from 
direct taxation, and the most burdensome imposts were 
thrown entirely upon the metayer tenants. But in Piedmont 
it is an essential condition of the metayer tenure that taxes 
should be paid by the landowner. In fact, one passage in 
Arthur Young's own work is sufficient to explain all the 
defects of the French metayer agriculture. He says that 
in Limousin and Angoumois (the provinces which Turgot 
. administered, and from which he formed his impression of 
the metayer system) ' the metayers have no virtual fixity, 
of tenure : whereas the metayers of Italy claim fixity of 



Metayers and Cottiei^s. 231 

tenure as an essential condition of their contract.' 'Again, 
in Limousin,' Arthur Young tells us, 'the metayers are 
considered as little better than menial servants, remov- 
able at pleasure, and obliged to conform in all things to 
the will of the landlord.' Under such circumstances the 
system must in every respect work badly, and the metayers 
themselves must inevitably be poor and wretched. 

The metayer tenure of Italy strikingly contrasts with ^^''^ ^^^ 
that of France, both in its results and in the nature of ^^g metayer 
the contract. Almost the entire land of Lombardy and ^^'^''x^'^f '■>[ 

. , f 1 Lombardy, 

Piedmont is cultivated by metayers, ihe excellence 01 the 
agriculture in these countries is proverbial; in fact, it is 
not surpassed in any country in the world. This excellence 
is not due to any peculiar natural advantages. The soil 
of Piedmont is scarcely of average fertility, and Lombardy, 
it is popularly believed, has for years been exposed to in- 
tolerable ojDpression by its Austrian rulers. Bad govern- 
ment is usually supposed to cause the impoverishment of 
a country. The Lombard system of agriculture must, 
therefore, be singularly efficient; for Lombardy has con- 
tinued one of the best cultivated and most productive 
countries during the whole period through which, as we 
are told, it was oppressed by Austrian tyranny. In Lom- 
bardy and Piedmont the land is not so much subdivided 
as in France; a metayer farm seldom exceeds sixty, but 
is never less than ten acres. The farm buildings are 
models of convenience and comfort. Competent observers 
affirm that nothing can exceed the skill and economy 
displayed in the management of the land. Chateauvieux, 
who is an excellent authority, says — 'In Piedmont and 
Lombardy the rotation of crops is excellent. I should 
think no country can bring so large a portion of its produce 
to market as Piedmont. Though the soil is not naturally 
fertile, the number of cities is prodigiously great. The 
acrriculture must therefore be eminently favourable to the 
nett, as Avell as the gross produce of the land.' Again, 



232 Manual of Political Economy, 

he remarks — 'In no part of the world are the economy 
and management of the land better understood than in 
Piedmont, and this explains the phenomenon of its great 
population and immense export of provisions.' 
and in the In the valloj of the Arno, the metayer farms are much 
X ^Irno smaller than in Piedmont and Lombardy, their size varying 
from three to ten acres; and yet, in spite of this great 
subdivision, numerous travellers have described the valley 
of the Arno as cultivated with singular care and skill, and 
as presenting altogether a most prosperous appearance. 
The holdings are so small that the homesteads of the 
metayers are situated at a short distance from each other. 
We are assured that these homesteads appear to be most 
neatly kept and have a thoroughly comfortable aspect, and 
the metayer peasants in this valley are well and tastefully 
dressed. It is true that English writers have said, if you 
enter the house of a metayer, he does not seem to live as 
much at his ease and to possess the same luxury as the 
farmers of other countries, but it is most unreasonable to 
make such a comparison. A metayer in the valley of the 
Arno, who, we are told, cultivates his five or six acres of 
land, ought not to be contrasted with our own farmers who 
possess large capitals ; such a metayer is essentially a 
labourer, he cultivates the land without the assistance of 
hired labour, and therefore if we wish fairly to compare 
the condition of an agricultural population in a metayer 
country with its condition under a different system of 
landed tenure, we ought to contrast the metayers not with 
capitalist farmers but with agricultural labourers working 
for hire. If this comparison is made, there certainly can 
be no doubt but that the metayers of Italy in their social 
and economical condition are in every respect greatly 
superior to our own agricultural labourers. 
Kindlfjfeel- Chateauvieux bears the most important testimony to 
^landtard^ the beneficial influence exerted upon the landlords by a 
and tenant metayer tenure. Nothing, in fact, seems to enforce with so 



Metayers and Cottiers, 233 

mucli practical effect tlie popular maxim of the present book ii. 
day, that property has duties as well as rights. The fol- ..2f:JfL> 
lowing very intelligent remarks are made by Chateau vieux: ^nder the 
'The metayer system constantly occupies and interests the ^^j^J^^'" 
proprietors, which is never the case with great proprietors, 
who lease their estates at fixed rents. It establishes a com- 
munity of interests, and relations of kindness between 
the proprietors and the metayers — a kindness which I 
have often witnessed and from which result great ad- 
vantages in the moral condition of society. The proprie- 
tor under this system, always interested in the success of 
the crop, never refuses to make an advance upon it, which 
the land promises to repay with interest. It is by these ad- 
vances, and by the hope thus inspired, that the rich pro- 
prietors of land gradually perfect the whole rural economy 
of Italy. It is to them that it owes the numerous systems 
of irrigation which water its soil, as also the establishment 
of terrace culture on the hills — gradual but permanent im- 
provements which common peasants, for want of means, 
could never have effected, and which could never have been 
accomplished by the farmers, nor by the great proprietors 
who let their estates at fixed rents. The metayer system 
therefore forms of itself that alliance between the rich pro- 
prietor, whose means provide for the improvement of the 
culture, and the metayer, whose care and labours are di- 
rected, by a common interest, to make the most of these 
advances.' Sismondi, who was a resident metayer land- 
lord, speaks in warm approval of the system. He proves 
by the most definite facts that under the metayer tenure 
the land is well cultivated, and that the condition of the 
metayer tenants is in every respect most satisfactory. 

The object we have had in view in making these re- imj^racH- 
marks upon the metayer tenure has not been to propose ^/ luro 



its introduction into England; this, even if desirable, ducingthk 
we well know is impossible, for it is the fundamental England. ^ 
principle of this tenure, that the rent of land should be 



2 34 



Manual of Political JEconomy. 



Cottier 
tenure. 



Ireland. 



regulated by custom and not by competition. But custom 
is each year exercising less influence upon the commercial 
arrangements of our own country ; and rents, profits, and 
wages are each year apportioned more completely in 
accordance with competition. We have, however, been 
chiefly induced to make these remarks, because the pre- 
judice of English writers against every system of landed 
tenure different from our own has been so great, that it 
is commonly assumed that the metayer tenure produces 
unmixed evils in the countries where it exists, and that 
these countries can never be greatly improved until it is 
replaced by a system of cultivation resembling our own. 
The facts we have mentioned are sufficient to disprove such 
an opinion, for we believe we have established the follow- 
ing propositions: — that the metayer system of cultivation 
is in many instances extremely efficient; — that the metayer 
tenants are generally in a condition greatly superior to our 
own day-labourers — and, that the metayer landlords are 
often induced to perform those duties pertaining to landed 
property which are too frequently neglected by the land- 
owners of our own country. Without wishing, therefore, to 
advocate any Utopian scheme for the introduction of this 
tenure into England, we still think it very important that 
its merits as well as its defects should be known. 

It has already been stated that we intend to describe 
the cottier and metayer tenure in the same chapter, be- 
cause the former system of cultivation exhibits, in an 
aggravated form, many of those defects which belong to 
the latter. The cottier tenure has existed on a far more 
extended scale in Ireland than in any other country, for 
before the famine of 1848 nearly the whole of the land 
in Ireland was cultivated by cottiers, and even at the 
present time they occupy a very considerable portion of 
it. We shall chiefly confine our remarks to the cottiers of 
Ireland, and these may be described as peasant cultiva- 
tors; for they rent the land directly from the landowner, 



Metayers and Cottiers, 235 

find cultivate it by their own labour. The produce of the book 11. 
land is, therefore, as in the case of the metayer tenure, ^— \ — '-^ 
entirely divided between the landlord and the cultivator; 
but there is a fundamental difference between the metayer 
and the cottier tenure. The rent which the metayer pays 
is definitely fixed by custom ; on the other hand, the rent 
which the cottier pays is entirely regulated by competition. 
Custom also gives to the metayer fixity of tenure, but no 
such fixity of tenure can be claimed by cottiers ; they com- 
pete against each other for the possession of a plot of 
land, and the landlord is only anxious to obtain those 
tenants who will give him the highest rents. Now the Cause of 
rack-rents, which are paid by the large capitalist farmers ^^^^^ j£^^'" 
in England, are regulated by competition ; and it may tiveen radc- 
therefore be asked — Can there be any essential difference l^J^J^^,^ 
between rack-rents and cottier-rents? There is this rents. 
essential and very important difference; a rack-rent is 
determined by the competition of capitalists, whereas 
a cottier-rent is determined by the competition of 
labourers. The consequences of this distinction we will 
proceed to explain. When farmers apply large capitals, 
as in England, to cultivate their farms, they expect to 
obtain the ordinary rate of profit for their capital, and 
for their labour of superintendence ; it is, therefore, quite 
impossible that the rent paid by English farmers could 
long continue so high as to prevent this ordinary rate of 
profit being received, for if this were so, capital would 
not continue to be invested in farming, but would in- 
evitably be applied in other employments, where the 
ordinary rate of profit could be secured. Rack-rents, 
therefore, are kept as it were in a position of stable 
equilibrium by the competition of capital, for competition 
of capital signifies that men are eagerly anxious to invest 
their capital to the greatest possible advantage ; and con- 
sequently, a rack-rent is in this manner so adjusted, that 
farming is neither much more nor much less profitable 



236 Manual of Political Economy, 

than other occupations. In the case, however, of a cottier 
tenancy, it is population, and not capital, which competes 
for the land. The Irish cottiers, for instance, are miser- 
ably poor peasants, who possess no capital except one or 
two tools and the scanty furniture of their wretched hovels. 
When, therefore, they compete for a plot of land, it is 
absurd to suppose that they calculate the rent which they 
are willing to pay, by considering whether their capital 
would secure a higher rate of profit in some other invest- 
ment; they are themselves fit for no other employment, 
and all the capital they possess would scarcely realise 
more than a nominal sum. 
Disastrous To a cottier, the possession of a plot of land is not a 
^thefouir ^^^^^i^n of profit, but subsistence; and consequently, 
sj/stemupon in any district, the more numerous is the peasantry, 
lourers' ^^® more actively will the land be competed for. The 
peasantry of Ireland were so long accustomed to poverty, 
that they were satisfied if they could occupy a plot of 
ground, and obtain from it just sufficient food to pro- 
vide a bare subsistence; they had no habitual standard 
of comfort ; every adult peasant married, and a want of 
food, with its consequent diseases, was the only check 
upon population. Such being the condition of the Irish 
peasantry, it may be naturally supposed that cottier 
.rents were forced up to their highest possible point- 
the cottier could only obtain just sufficient to live upon, 
and the whole remaining produce was paid to the land- 
lord as rent. The pecuniary amount of these cottier 
rents may be regarded as merely nominal; a peasant was 
so anxious to obtain a plot of ground, that he cared not 
what rent he offered for it; he well knew that the land- 
lord, whatever was the nominal amount of rent, must 
leave him sufficient to live upon. And thus we learn, 
from the evidence taken before Lord Devon's Irish Poor 
Law Commission, that the nominal amount of many of 
these cottier rents exceeded the whole produce which the 



Metayers and Cottiers, 237 

land yielded, even in the most favourable season. The book u. 
cottier was consequently in constant arrear to his land- « — !,, — 1^ 
lord; the landlord had of course a legal right to distrain 
for the rent, but such a remedy was of no value, for the 
whole property of the cottier was scarcely worth seizing. 
Neither could the landlord gain much by resorting to 
eviction, for the evicted tenant would only be replaced 
by another tenant of the same character, whose arrears 
of rent would accumulate with similar rapidity. And 
although eviction is a legal right of the landlord, yet he 
was restrained from exercising this right by the powerful 
motive of personal safety. Assassination was the retribu- Assasshm- 
tion with which the cottiers of Ireland not nnfrequently 
punished an evicting landlord. The economical condition 
of no other country has ever been so unsatisfactory as 
was the condition of Ireland under the cottier tenancy; 
for the cottiers, having taken the land at a rent which 
it was impossible for them to pay, had no motive what- 
ever to be industrious ; if by skill and labour the land 
was rendered more productive, the increased produce was 
absorbed in the rent of the landlord. The rents were, The direct 
in fact, fixed so high, that whether the seasons were ^^^ cottier 
favourable or not, whether the land was well or badly system is to 
cultivated, the cottier tenants could never expect to obtain ^tkepeopiV 
for themselves any more than a bare subsistence ; hence «^t^ ^over 
it has been aptly remarked, that the Irish cottiers were ^^^^^ 
the only people in the world whose condition was so 
deplorable that they gained nothing by being industrious. 
No scheme could possibly be devised which would act 
more effectually to impoverish the people, and throw the 
land into the most wretched state of cultivation. The 
progi'ess of Ireland cannot be marked by a surer sign than 
b}^ the gradual abolition of the cottier tenure. 

In Ireland there was also a subsidiary kind of tenure, Conacre. 
termed conacre. If a landlord required any labour to be 
done on his estate, it was a frequent practice for him to 



238 



Manual of Political Economy. 



CH. vir. 



A feudal 
tenure. 



Tenant- 
right of 
Ulster. 



BOOK II. pay tlie labourers he employed, not by money, but by 
giving tiiem a plot of manured ground rent free; the plot 
thus held, on the condition that the tenant should give 
the landlord so much labour, was termed conacre. This 
tenure was feudal in its character ; for during the middle 
ages, a great portion of the cultivated land was granted 
to tenants on the condition that they should be bound 
to perform certain personal services for the landowner, or, 
as he was then termed, the lord. These personal services 
consisted either in providing the lord with mere ordinary 
manual labour, or else with men and weapons for war- 
like puposes. 

In Ulster a different kind of landed tenure prevails, in 
consequence of tenant-right being established in that 
portion of Ireland. The Ulster tenant-right has no legal 
sanction, it is simply enforced by public opinion, and 
the landlords grant the privilege because they fear to 
encounter the consequences which a refusal might entail. 
As we proceed to explain the nature and mea.ning 
of tenant-right, we shall show that a tenant-right may 
exist, not only with a cottier, but also with a rack-rent 
tenure. In the case of a rack-rent, a tenant-right may 
be proposed in order to meet a defect which seems insepa- 
rably connected with a system of landed tenure like our 
own, the chief characteristic of which is, that the rents are 
adjusted by competition, and that land is leased at fixed 
rents for only a limited term of years. The defect we 
allude to has already been pointed out, and it is simply 
this : under such a system the land has seldom a fair 
chance of being properly cultivated, for a tenant would 
often effect great improvements in his farm, by the appli- 
cation of increased skill and capital, if he could feel any 
security that he should be permitted to enjoy the full 
advantage of the improvement at the expiration of his 
lease. A tenant cannot be expected to invest capital 
almost solely for the advantage of his landlord; and yet 



Metayers and Cottiers, 239 

under our present system he might very possibly do this, book it. 

for when a new lease is granted, his rent will very -—1^ !^ 

probably be raised in proportion to the extent to v/hich the 
farm has been improved. The object of a tenant-right is 
to give the tenant a legal claim to be compensated, when 
leaving his farm, for any improvements he may have 
effected in the land, either by his skill or his capital. If 
such a tenant-right were practicable, it would in many Advan- 
respects be very desirable, for it would exert a most ^^fgl^ie'' 
decided influence in promoting good agriculture, by en- produced hy 
couraging the enterprise of the tenant farmer. The land- ^j^y7A"L" 
lords would no doubt urge, that if a tenant-right were England, 
established by law, the privileges of private property 
would be unjustly interfered with. They would doubtless 
say, we ought not to be compelled to let our land hampered 
with conditions to which we object; we do not compel any 
tenant to rent our land, and if he is willing to rent it 
from us without a tenant-right, the condition cannot be 
justly forced upon us. But in answer to such arguments, 
it maybe rejoined, that the interest of the nation demands 
that the land should be properly cultivated, and as long 
as there is no confiscation of private property, the law has 
a perfect right to interfere, if it can be proved that with- 
out such interference the resources of the land can never 
have a fair chance of being properly developed. 

In England tenant-right has never been demanded, and Irish ten- 
the question has never excited much practical interest; ^^ Connected 
Ireland, on the contrary, the people have loudly claimed w?YA the cot- 
tenant-right as a most precious privilege, and for years ' ' ' ". 
there was no subject which excited a more angry contro- 
versy. But the Irish tenant-right may be regarded as 
essentially a part of the cottier tenure, and the purposes 
which a tenant-rio^ht fulfils when it exists with a cottier 
tenancy are very different from the effect which a tenant- 
right produces if engrafted on a rack-rent tenure. It 
is this difference which explains why tenant-right has 



240 Manual of Political Economy. 

BOOK n. not been proposed in England, but has been so eagerly 
^-^^^i^ demanded in Ireland. It has been previously stated 
that there is an essential distinction between these two 
tenures ; a rack-rent is determined by the competition of 
capital, a cottier-rent is determined by the competition 
of population. When a cottier tenure prevails, the out- 
going tenant receives a certain sum from the incoming 
tenant, for the goodwill of the occupation. This pay- 
ment is not even pretended to be made in order to remu- 
nerate the outgoing tenant for any improvement he might 
have effected on the land. If the payment served this 
purpose, there would manifestly be no essential dif- 
ference between a cottier or a rack-rent tenant-right. 
But the payment is made by the incoming tenant in order 
to secure for himself the occupation of a plot of land; 
and the whole question of the justice or injustice of such 
Injustice a tenant-right turns upon this consideration, whether the 
and evil of goodwill of the Occupation of the land belongs to the land- 
tenant- lord or the tenant. We think there can be no doubt that 
right. -^ ^g -j-j^Q ^qYq property of the landlord. The incoming 
tenant is willing to make the payment, not because it may 
be a profitable investment of capital; his object in obtain- 
ing a plot of ground is, that he knows that it will provide 
him with the means of subsistence; for, let him once be 
settled on a plot of ground, he feels assured that the land- 
lord must leave him enough of the produce to live upon, 
and therefore he is willing to secure a small occupation 
of land by bribing the former tenant. He is prompted to 
do this by the same motives which induce him to offer the 
landlord a rent which he full well knows can never be 
paid. But the fact that such a tenant-right, which is 
neither just nor legal, can be maintained, is a sad evidence 
that the social condition of Ireland has been so deplorable, 
that a right could be established by terrorism with as much 
certainty as by law. 



241 



CHAPTER VIII. 

POPULAR REMEDIES FOR LOW WAGES. 



11 HE great mass of the labouring population, in even ^00^ "• 
_ the most prosperous and civilised countries, is so poor, < — ^-v — ^ 
that a philanthropic sympathy is excited, and remedies are Remedies 
constantly beino- proposed with the object of improving the/*^^ ^^^ 

, . „ , rni . , -T (, , r . , wages are 

condition of the poor. The practical utility 01 political often U- 
economy cannot be better illustrated than by applying its ^^^^r^/. 
principles to test their remedies. When this is done many 
of them will prove to be vain and illusory, and it will be 
shown that these remedies not unfrequently cause the 
opposite effects to those which they are intended to produce 
by increasing the poverty they seek to alleviate. Strikes 
and cooperative societies are the two remedies for low 
wages which, at the present time, excite most public 
interest, and in the efficiency of which different sections 
of the labouring class place most faith. We shall therefore 
devote a separate chapter to the influence which may be 
produced by strikes and cooperative societies. But before 
we do so, it will be well to consider some of the other 
remedies which excited much attention in their day, and 
in which many people still place great confidence. 

If our readers revert to the chapter in which the laws Principles 
of wages were discussed, it will be perceived that the ^f^^^^^^l^ 
following principles can be applied to test the efficiency he tested. 
of any of the means which may be proposed to raise 
wages. The remark has frequently been made that the 
capital of the country provides its wage-fund. This 

R 



242 Manual of Political Economy. 

wage-fund is distributed amongst the whole wage-receiving 
population, and, therefore, the average of each individual's 
wages cannot increase unless either the number of those 
who receive wages is diminished, or the wage-fund, which, 
in other words, may be described as the capital of the 
Do they country, is increased. Therefore, with regard to all ques- 
tend to in- ^j^j^g concerning a general rise of wages, we should first 
capital or endeavour to discover whether the agency by which this 
^vomdatM ^^^® ^^ intended to be effected will exert any influence in 
increasing either the capital of the country or in diminish- 
ing the number of the labouring population. If we can 
prove that such an influence will not be exerted, we 
may conclude that a general rise of wages cannot take 
place. In the consideration, however, of such a question 
several precautions must be carefully observed. For 
instance, it has been said that the produce of labour is 
divided into two shares ; one of these shares is termed the 
profits of capital, and the other share is termed the wages 
of labour ; therefore, cceteris paribus, if wages increase, the 
share apportioned to capital, or, in other words, profits, 
must diminish. Hence it may be concluded that, when 
wages increase, profits must decrease. But, before admitting 
such a conclusion, it is necessary to enquire whether 
circumstances may not occur which will enable a rise of 
wages to take place without being accompanied by any 
decrease in profits. If, for instance, labour is made more 
efficient by the labourer becoming more skilful and more 
energetic, the produce of labour will be increased, and 
the share allotted not only to labour, but also to capi- 
tal, might be augmented. If, therefore, any method is 
Is the in- suggested by which it is proposed to increase wages, it 
crease of jg j^q^\^ important to endeavour to discover whether the 

^ages ex- ^ ^ ^ 

pectedfrom proposed mcrease will be taken from the profits of capital 
Uo^oT^' ^^ ^^^^ *^^ additional wealth produced by making labour 
profit or an in any manner more efiicient. In the first case, the rise 
tncreased ^£ ^ages cannot be permanent ; the nature of the rise, as 



Populai' Remedies for Loiv Wages, 243 

it were, creates its own destruction — the amount of capital book n. 
accumulated depends on the inducement to save. If, — lJ^ 
therefore, profits are diminished, there is not so great an effidevn/ of 
inducement to save, and the amount of capital accumulated ^(^^our? 
will decrease; the wage-fund will consequently be dimi- 
nished, and there will be a smaller amount to distribute 
amongst the labouring classes. The practical importance 
of this consideration will be shown when discussing the 
subject of strikes. We will now proceed to consider in 
detail some of the popular remedies for low wages. 

Our own statute-book proves that the attempt has Attempts to 
frequently been made to regulate wages by law. "^^^ wages fy 
enactments which have been passed with this object law 
illustrate the shifting policy of our Government. On one 
occasion, when the employer is to be favoured, a law is 
passed limiting the amount of wages which the labourer is 
to receive. When the employed is to be protected, the 
employer is forbidden to offer the labourer less than a 
certain remuneration. Such legislation is always either 
futile or mischievous. If a law was enacted to-mor- are always 
row which provided that no able-bodied agricultural "^^^/^JJ^^^^ 
labourer should receive less than fifteen shillings a week, 
our philanthropists Vv^ould, no doubt, applaud the measure, 
and, so little is political economy understood by those 
who profess it, that even the Social Science Association 
would probably pay homage to the statesman who should 
introduce such benevolent legislation. If a tenant farmer, 
who now pays his labourers ten shillings a week, was Case of 
lecrally compelled to raise these wag^es to fifteen shillinars Sif^^^ ^^' 

<=> 'J i. _ o o bowers ex- 

week, the expenses of his farm would be greatly increased, amined. 
and his profits would, in a corresponding degree, be 
diminished. The farmer would therefore say — Why should 
I continue to cultivate my farm at a comparative loss? 
Before my expenses were arbitrarily increased, I was not 
realising more than the ordinary profits of trade. I will 
therefore remove my capital as quickly as possible to some 

E2 



2 44 Manual of Political Economy. 

more lucrative employment. But it may be said, there 
are two ways in which the farmer might be compensated 
for the increase of his expenses — his rent might be reduced, 
Impracti- or the price of agricultural produce might rise. If he 
cabihty of ^^q-^q Compensated by a reduction in his rent, there are 

raising ^ '^ , . , . 

their wages those wht), no doubt, would consider that the legislation 
\jon^^^^^' ^^^ successful, because they might think that it would be 
most desirable that a certain amount should be taken from 
the rent of the landlord in order to improve the condition 
of the agricultural poor. It may, however, in the first 
place be remarked, that when a law produces these results, 
the private property of one class is confiscated and dis- 
tributed amongst another portion of the community, and 
it is difficult to overestimate the serious injury which an 
unjust confiscation of private property inflicts upon the 
well-being of a state. But if no reduction of rent were 
granted to the farmer, and if he were compelled by law to 
pay high wages to his labourers, he could not continue 
to cultivate his farm without sacrificing his property, 
unless he were compensated by a rise in the price of 
agricultural produce. But if agricultural produce advances 
in price, food becomes dearer and the labourers would thus 
lose a great portion of the adva.ntage which they might hope 
to obtain from their wages being regulated by law. There 
are, however, other considerations which will more fully ex- 
hibit the futility of such legislation. If the wages of agri- 
cultural labour were raised in the manner we have supposed, 
a rapid increase of population would be at once stimulated. 
Consequently in a few years the number of those competing 
for employment would be greatly augmented; the wages, 
therefore, of every employment would gradually be reduced 
to the lowest limit permitted by law, and ultimately a 
large surplus of unemployed population would be thrown 
as a burden on the poor-rates of the country. Two reasons 
have induced us to take the example of agriculture in 
order to illustrate the effects of a legislative interference 



Popular Remedies for Low Wages. 245 

with wages. In the first place the remuneration received book n. 
by agricultural labourers is so low, that it may be thought vf^iJI^. 
they have the first claim to be protected ; secondly, 
interference in this case might be popularly advocated be- 
cause it may be thought that the increased remuneration 
could be entirely provided out of the reduction in the 
landlord's rents. 

The investigation would have been more simple if we Case of 
selected an example not involving the element of rent, ^anufac- 
Suppose the Factory Acts which control the number oituring 
hours that men should be employed, and the number Qf ''^^^^ '•""*^^- 
hours the children should be at school, had also declared 
that wages throughout the factory district should be 
increased twenty per cent. If the manufacturers were 
not compensated by higher prices for the increased 
cost of production thus enforced upon them, their profits 
would of course be reduced ; they would withdraw their 
capital from the trade, and we should in time be supplied 
by foreign countries whose labour was cheaper. So 
keen is the competition at the present time between 
different countries in many branches of trade, that it is 
quite possible to conceive that an unnecessary impedi- 
ment imposed in this country would give a foreign country 
such an advantage that we could not compete against it. 
If, therefore, wages in any particular branch of industry 
were forced up by Government interference, the labourers 
might very possibly altogether lose the employment to 
which they had been accustomed. 

To provide work for the unemployed is a service which Effects of 
many think they have a much greater right to demand ^J!J^'J^^^/|J^'J 
from the Government than the regulation of wages by law. to employ. 
We will trace some of the consequences that would ^^2inary 
ensue, if every applicant had a right, not only to demand wa^es. 
work from the Government, but to receive the ordinary 
wages. When such a privilege was first granted, it might 
prove very beneficial to the labouring classes, and would. 



146 Manual of Political Economy. 

not probably be injurious to the general community ; but 
if the privilege were continued, its ultimate effects would 
The effect ^^ doubt be most disastrous to the nation. If the Govern- 
might be ment were compelled to find work for the unemployed, it 
leueficial would of course be necessary to provide the money by 
increased taxation. If this increased taxation was sup- 
plied entirely from capital, the wage-fund would not 
be augmented, but it would, in fact, only be distri- 
buted by different owners. The wages which are now 
paid by the Government would have been before paid 
by individual employers, and therefore the labouring classes 
would not in the aggregate have a greater amount of 
wages distributed amongst them than they were accus- 
tomed to receive. But increased taxation, in a country 
like our own, will only be paid to a very limited extent 
out of capital. If the income tax were doubled, the ad- 
ditional 9,000,000?. which would be thus obtained would 
be almost entirely saved from personal expenditure. An 
employer would rarely be induced to dischai-ge workmen 
because the income tax was increased. There is there- 
fore, in the first instance, a real gain for the working 
classes ; if the wages paid to labourers by the Government 
are obtained, not from capital, but from a diminution in 
the personal expenditure of the tax-payers. This benefit 
will often not be confined to the labourers; for a Govern- 
ment may frequently increase the wealth of a country by 
applying a loan, or increased taxation, to public works, 
and might which would not be carried out by private enterprise. It 
justify such therefore appears that, if a great number of labourers were 

a measure ^^ ' ° • i i i 

in case of thrown out of work by some sudden and unavoidable cause, 
temporary ^ Government is perfectly justified in promising, as a 
cies; temporary expedient, to find work for the unemployed. 

Such a policy need not in any way cripple the productive 
resources of the country, because the money which is paid 
away by the Government in wages will not, in the first 
instance, be provided out of the capital of the nation. The 



Popular Eemedies for Low Wages. 247 

most serious consequences, however, will ensue, if the book ii. 
Government should continue to give employment to all vf^LJ^^ 
applicants ; for population has an indefinite power to in- 
crease ; and, therefore, no limit can be assigned to the hut must he 
numbers which Government will be compelled to employ, if^lJ^^a- 
if it engage to give work to all those who applied for it. sure were 
If Government offered such assistance to the working ^^*^^*"^*^ ' 
classes, there can be no doubt that, in the present state of 
society, an increase in population would be so powerfully 
stimulated, that the number of those seeking employment 
would be constantly augmented, and at last the resources 
of the nation would be strained to • the utmost to pro- 
vide the wages which the Government would be called 
upon to pay. This is no imaginary supposition, for 
statistics have demonstrated that the lower classes of 
society marry with utter recklessness. If they can live 
when they first marry, they are perfectly contented ; the 
additional expenses which a family entails are not thought 
of If, therefore. Government found work for all appli- hecause 
cants, marriages amongst the labouring classes would be so ^^^^^^l^check 
encouraged, that increase of population amongst them on popula- 
would no longer be restrained by any checks. The State, ^^^' 
therefore, could not continue to find work for the unem- 
ployed, unless a law was passed, which should place some 
checks upon population. The absolute necessity of this pre- 
caution is shown in our own system of Poor Laws. Every 
parish is bound to provide all those who are charged upon 
it with food and clothing sufficient to protect them 
against physical want. But those who claim this relief 
can be compelled to reside in the union, where they are 
subjected to certain restraints ; man and wife, for instance, 
are not permitted to live together ; if this were allowed, 
union workhouses would become establishments for breed- 
ing hereditary paupers, and the poor-rate would soon 
absorb the whole wealth of a parish. It therefore appears 
that there is a fundamental difficulty connected with all 



248 Manual of Political Economy, 

attempts to improve the material condition of the poor 
by any permanent system of relief; for population is en- 
couraged by granting pecuniary assistance to the poor, 
and consequently the money required for such a scheme 
of general relief would constantly absorb an increasing 
amount of wealth. This difficulty can only be met by 
placing some check upon population ; and it would be 
impossible for our present Poor-Law system to continue, 
if man and wife were permitted to live together in the 
union workhouse. This should be remembered by those 
who so freely attack such a restraint upon personal liberty, 
as harsh and unnatural. 

Any relief which only effects a slight improvement in the 

condition of the poor, can be of no permanent advantage. 

The benefit which is, in the first place, conferred creates 

its own destruction, by encouraging an increase of popu- 

Schcmesof lation. Any scheme of general philanthropy cannot, 

pUianthro- therefore, be really efficient, unless it so decidedly improves 

py must be ' -^ . "^ ■•■ . 

sufficient to the condition of the workmg classes, that they are, as it 
raise the -^q^q, at once lifted into a different stas'e of social and 

lower ' o 

classes to a material comfort. The lower classes marry recklessly, 
staTof Tt»ecause they do not feel that they have any social position 
comfort, to maintain, and they often live so miserably that they 
cannot be said to have an habitual standard of comfort, such 
as they will not willingly resign. Men in the middle and in 
the upper classes will not, as a general rule, marry if they 
expect to be obliged to live in an inferior state of comfort, 
and to bring their children up in a lower social position. 
Similar prudential motives would control the labouring 
classes if their material condition could be once greatly 
improved. They would then possess, as the middle and 
upper classes do now, an habitual standard of comfort, 
which they would not willingly sacrifice by improvident 
marriages. These considerations naturally lead us again 
to refer to emigration as one of the most complete and 
satisfactory remedies for low wages. When emigration 



Popular Remedies for Low Wages. 249 

diminishes the number of those who compete for employ- book ii. 

-1 , , , ' • • j-l, CH. VlIT, 

ment to such an extent as to cause a rise- in wages, tne > ,, 

benefit conferred upon the working classes is subject to no 
drawback; and, moreover, the whole of this advantage is 
not represented by the increase of wages. Emigration, when Effects of 
on a large scale, has aided the development of the new ^^^aTarge 
colonies, which not unfrequently supply us with cheap scale. 
food, and invariably afford a market for our exports. 
Both of these circumstances contribute to benefit the 
labouring classes; they of course derive great advantage 
from cheap food, and the expansion of our commerce 
tends to make their employment more regular and remu- 
nerative. If, therefore, distress is caused by low wages, 
and it is desirable to make wages higher, Government 
cannot do anything which will with so much certainty 
attain this object as to encourage emigration in every 
possible way. When people emigrate as rapidly as they 
did from Ireland after the famine of 1848, the rise in 
wages may be so great, that a permanent effect is pro- 
duced on the social condition of the people. Agricultural Its Une- 
labourers are those who would derive the greatest ^^'^^'^^-'^noe on the 
tage by emigrating; for theirs is the labour which is re- labouring 
quired to develope the resources of a country like Australia, ^ ^^^^' 
where vast tracts of fertile land are as yet uncultivated. 
Ignorance has prevented the agricultural labourers from 
fully recognising the benefits of emigration, and ignorance, 
by magnifying the difficulties of the voyage, has made them 
unwilling to leave our shores. Emigration is temporarily 
checked by the American disasters, but it may at any 
time recommence with unexpected rapidity. If our worse- 
paid labourers should show an anxiety to escape from the 
poverty to which they seem doomed, the working classes 
might then emigrate in such numbers, that wages would 
obtain a sudden and important rise. This rise of wages 
might enable those of our labourers who have been most 
miserable to live in a style of comfort to which they had 



250 Manual of Political Economy. 

never before been accustomed; and if they so appreciated 
this improvement in their condition, that they would not 
sacrifice it to improvident marriages, the benefit con- 
ferred would be a lasting one, and we might never again 
have a class of labourers who were compelled to work 
hard for ten shillings a week. 
Other re- Two other remedies for low wages have been proposed, 
^owwaaZ ^^ inany respects differing essentially from those which 
have been noticed in this chapter. These schemes are 
known as the Parish Allowance and the Allotment systems, 
and they are both intended to subsidise the wages of the 
labourer, when his remuneration is supposed to be too 
Origin of low. A succession of bad harvests at the beginning of 
i^fJP^'^^^^' the century, combined with the w^ar expenditure, made the 

A Uowance . "^ . . . 

system. price of food extremely high, whilst at the same time wages 
were so low that it was considered the labourer had not 
sufficient means to support himself and family. His wages 
were therefore subsidised by grants from parish rates, 
and these parish allowances were made to the labourers on 
a large scale, for thirty or forty years, before 1832. This 
system of relief had many advocates, and the cause of its 
popularity may perhaps be explained in the following 
manner. There are few who do not possess sufficient 
human sympathy to be greatly distressed when they 
observe their fellow-men suffering from the want of the 
necessaries of life. Any plan, therefore, is eagerly wel- 
comed, which affords relief to such suffering. The grave 
responsibility which a man incurs in causing children to 
be born, has never been adequately recognised in this 
country; and the man who marries prematurely, and be- 
comes burdened with a family which he cannot support, 
is always pitied, and never receives the censure he deserves. 
Popular sympathy and charity seem so adjusted, that the 
man who is most assisted is he who has been most im- 
provident. 

Its effect Parish allowances were therefore popular, because for 



Popular Remedies fo7' Low Wages. 251 

a time they relieved distress. But some of the advocates book ii. 
of the system were influenced by more selfish motives ; for — l.^ — ^ 
there were those who no doubt had the shrewdness to 
perceive that parish allowances must ultimately reduce in lowerinrj 
wages, and consequently employers would have the wages '^^y^^- 
which they pay to their labourers partly provided by 
allowances raised by a general rate. We will verify this 
remark by tracing the effects which the system would 
ultimately produce on wages. Let it be supposed that 
the current wages were eight shillings a week, and that 
an allowance of two shillings per week is granted by 
the parish in order to raise the wages to ten shillings a 
week. If employers should pay the same wages after this 
gratuity had been granted to the labourer, the allow- 
ance would be an entire gain to him ; but we believe that, 
if the system were long continued, wages would be so 
much reduced, that the wages received, together with the 
allowance, would soon be not greater, and probably less, 
than the wages obtained before such a system of relief 
commenced. When the labourer is in so distressed a con- 
dition that it is considered necessary to subsidise his 
wages, we may with certainty conclude that there is a large 
surplus of unemployed labour; for wages would not be so 
low as barely to provide the labourers with the necessaries 
of life, unless the supply of labour was greatly in excess 
of the demand. It therefore appears that the allowance It tends to 

.7,7 

system will only tend to make the supply of labour still ^^^^ly '^f 
more disproportionate to the demand ; for the unemployed labour ex- 
will immediately become more anxious to obtain work, if ^^^^^J^'^^ 
the wages of those who were already employed are in- 
creased by a gratuity from the parish. Those who are 
out of work will be induced to go to the employers 
and say — Why do you continue to pay your labourers 
eight shillings a week, when we are perfectly willing to 
work for you at seven or even at six shillings a week, now 
that our wages will be increased by the parish allowance ? 



252 



Manual of Political Economy, 



BOOK n. 
CH. viri. 



The allot- 
ment sys- 
tem has 
generally 
beneficial 
effects. 



It would be unnatural to expect that employers would 
not avail themselves of the advantage of this competition, 
and they will be the more anxious to do so in order to 
compensate themselves for the increased parish rates 
which the allowance system has entailed upon them. Un- 
less, therefore, the allowances were constantly augmented, 
the whole wages received, including the gratuity granted 
by the parish, would be rapidly forced down, by com- 
petition, to an amount not greater than the wages pre- 
viously paid. In fact, the experience of the thirty years 
during which this system of parish relief continued, affords 
the clearest evidence that wages were reduced by its in- 
fluence. 

The allotment system, as a means for subsidising wages, 
is no doubt in every respect greatly preferable to parish 
allowances. The advocates of allotments formed high 
expectations of the benefits which they would confer upon 
the labouring classes. Other high authorities have ex- 
pressed a different opinion, and maintained that allot- 
ments could not permanently be of much advantage to the 
labouring classes. The one side has probably as much 
exaggerated, as the other has underrated, the advantages of 
the system. There is a very important distinction between 
an allotment and a parish allowance. A parish allowance 
in no way increases the industry or the wealth of the 
country; charity is enforced from one class, in order to 
benefit another. But allotments are small plots of ground, 
cultivated by the labourers after they have done their 
regular work, and therefore the system stimulates industry, 
and increases the wealth of the nation; for productive 
labour in all probability would not be applied, were it not 
induced by these allotments. The rent of an allotment 
is generally so high, that a labourer cannot hope to realise 
a large profit ; but it will answer his purpose to cultivate 
one, even if a very inconsiderable surplus is left to him, 
after he has paid his rent. JSTo doubt, if the number of 



Popular Remedies for Low Wages, 253 

hours were calculated which he spends on his allotment, it 
would be found that he would not be adequately remune- 
rated for this labour, according to the ordinary wages he 
receives; but nevertheless the allotment makes him richer, 
because without it this extra labour would not be exerted at 
all. Consequently an allotment would generally be most 
unprofitable to the labourer, if it required him occasionally 
to absent himself from his regular work. Those who know It increases 
the labouring classes, must admit that an allotment gives o/^Ag"^w- 
them a supply of potatoes and other commodities, which cultural 
greatly improve the comfort of their living, and which cer- ^ ^"*^^' 
tainly could not, as a general rule, be obtained, if it was 
necessary to purchase them out of the labourer's ordinary 
wages. Some, however, object to allotments, on the plea 
that they induce the labourers, who are already worked 
too hard, to work still harder. It is urged that the man 
who has to work ten hours a day, as an ordinary labourer, 
ought to devote the little remaining time he has at his dis- 
posal, either to his family, or to his own mental improve- 
ment. But it is idle to suppose that the labourer of the pre- 
sent day will do any such thing, for the present agricultural 
labourers are too ignorant to take delight in any intellectual 
pursuit; it is therefore very important that they should 
have some means of profitably employing their spare time. 
It is true that they are a hard-worked class, but the labour 
which they spend on. their allotments is not irksome ; in 
fact, the interest they take in watching the growth of the 
various vegetables which they plant, is to them a source 
of great pleasure. 

With regard to the town labourers, who are engaged in and is use- 
sedentary occupations, it is most important that their {q^^J^s^ 
leisure time should be spent in the open air. To such 
labourers, therefore, the cultivation of an allotment is a 
healthful and most beneficial exercise. In large towns it 
is impossible to supply the labourers with allotments ; any 
land which can be obtained for the purpose is either far 



254 Manual of Political Economy. 

BooKn. too distant or expensive; but land which is adjacent to 
CH. viir. ^ gjjr^g^i;[gj, towns may, when partitioned into allotments, 
produce a most remunerative rent, and yet the labourers 
will at the same time derive from the cultivation of these 
small plots of ground a most useful addition to their ordi- 
nary wages. 
It does not Those who disparage the utility of allotments also 
'unTto ^ maintain that they exert an influence to increase popula- 
stimulate tion, and in this manner cause wages ultimately to be 
jpo/ju a ion. ^Q^^j^^QQ^ r|Tj^^g opinion can no doubt be supported by 
apparently strong arguments. The great mass of the 
labouring population, it is said, are so improvident, that 
they marry directly they have money enough to settle in 
a home. If, therefore, allotments add a subsidy to the 
ordinary wages, it will follow that a greater number will 
be in a position ta marry, and the number of marriages 
will consequently be increased. Hence the labouring 
population will be increased, and wages will be reduced; 
it is therefore said, that although allotments may give some 
temporary assistance, yet they ultimately reduce wages, 
and impoverish the labourers by stimulating population. 
But this theoretical argument does not sufficiently con- 
sider the real facts of the case. The allotment system, as 
we have before remarked, can only be taken advantage of, 
to any considerable extent, by country labourers, and by 
those who are employed in the smaller towns. No one 
who knows the economy of an agricultural village can 
suppose that a labourer is induced to marry because he 
rents a plot of ground from which he manages to obtain 
a few sacks of potatoes. An able-bodied agricultural 
labourer thinks he is in a position to marry, however low 
his wages may be, and he is prevented from marrying by 
no other cause except the difficulty of obtaining a cottage ; 
for landlords, in order to avoid a heavy poor-rate, limit 
as far as possible the number of cottages which they 
permit to be built on their estates. Again, with regard 



Popular Remedies for Low Wages. 255 

to the town labourers, it cannot be pretended that they book n. 
obtain from an allotment such addition to their wages as ^^^• ™\ 
would produce any real effect in promoting marriage. 
Although we are therefore willing to admit that the advan- 
tages to be derived from allotments were, in the first instance, 
exaggerated ; yet we believe that, in many cases, the system 
has proved a most valuable assistance to our labourers. 

Before concluding the remarks which have been made iZemeeZ/es 
in this chapter on some of the most popular remedies for^^^^.*7 

■■■ 1 JT inefficient 

low wages, we ought to observe that some of those reme- as a per- 
dies, which we have proved to be inefficient in their per- ^'^^^^^ . 

^ . ^ means oj 

manent effects, may yet, with advantage, be resorted to, in relief may 
order to meet some temporary emergency. For instance, ^^J^jTuse- 
it may be an unsound and ruinous policy for a Government /wZ. 
to continue through a long period to find work for all the 
unemployed. But if some sudden disaster, such as the 
failure of an article of food, should devastate a country 
with a famine, then a Government is bound to resort to 
exceptional measures, in order, as far as possible, to relieve 
the distress. Under such circumstances the most desirable 
course to be pursued is to commence public works, and 
thus distribute a large sum in wages. The English 
Government would have only perpetuated the poverty of 
Ireland, if the money which was so properly voted during 
the famine year of 1848, had continued to be granted in 
successive years; for then the Irish peasantry would have 
been discouraged from emigrating, and would have re- 
mained at home, living in the same state of wretchedness 
and improvidence as before. The Irish resorted, of their 
own accord, to the remedy which we have described to be 
the most efficient of all to raise wages; for after the year 
of famine, emigration commenced on such a large scale 
that it has properly been termed the Irish exodus, and as 
a consequence of this emigration, a most marked and 
happy improvement has been produced in the condition of 
the Irish peasantry. 



25^ 



CHAPTER IX. 

TKADES-UNIONS AND STRIKES. 



BOOK IT. fT^HE frequency of strikes during the last few years has 

' — ^v ' J. been a prominent feature in the social condition of 

Importance England. The labouring classes would not be always 
sidering ready to make such great sacrifices to support a strike, 
the question ^jn\.Q^^ they believed that it was the most efficient remedy 

Of S1j7*i1c€^ 

calmly. for low wages. The subject demands a most careful and 
a most dispassionate consideration, for the prejudices of 
each party in the dispute are so strong, and the feelings 
excited so angry, that little is heard but useless recrimina- 
tion and unreasoning partisanship. 

According to popular ideas, strikes are inseparably 
Trades- connected with trades-unions, and it will therefore be 
unions have necessarv, in the first place, to settle the much-disputed 

two objects ' . . . . 

that of or-' question as to the purposes which trades-unions are in- 
dinary tended to fulfil. A committee was appointed by the 

friendly r^ • -t n • a • • • • i • • i • 

societies, oocial bcience Association to investigate this special point. 
and that 0/ 'j'j^eir report is valuable, and from it and other sources of 

organisa- . . . i /» n • i • 

tions to in- information, we arrive at the following conclusions : — 
^uence Trades-unions serve two distinct purposes. In the first place 

wages. . . . . 

a trades-union performs the ordinary functions of a friendly 
society. A member of a trades-union is assisted, when 
thrown out of work, either by illness, or by the stagnation 
of trade. "We need not here farther discuss the effects of 
a trades-union, when it is simply used for the charitable 
purposes just indicated. But a trades-union is always 
something more than a friendly society, its chief purpose 



Trades-Unions and StriJies. 257 

is generally to organise the workmen of a particular trade book ir. 
into a combination sufficiently powerful to enforce various - *^"-^^^- ^ 
regulations, both upon masters and men. We shall discuss 
the nature and effects of many of these regulations ; but 
before proceeding to do so, we wish to caution our readers 
against the opinion that trades-unions are necessarily con- 
nected with strikes. Strikes may take place if these trade 
societies did not exist, but strikes and trades-unions are 
so frequently associated together, because the organisation 
of a trades-union affords means for the combined action 
which a strike requires ; there is no doubt that a strike 
would seldom be organised, unless the power of combina- 
tion was previously provided by trades-unions. 

It may be remarked, at the outset of our investigation, ^ trades- 
that it is impossible for a trades-union permanently to oniTj-aise 
raise the wages which are paid in any branch of industry, the wages of 
unless it can restrict the number of labourers who should tar^radehf 
be permitted to work at the trade. The promoters of these limiting tlie 
societies long since perceived this ; and many of the ^corkmen. 
rules of trades-unions are framed with the specific object 
of restricting the competition of labour. Thus trades- 
unions will not permit a master workman to take more 
than a certain number of apprentices. In the hat trade, 
the number is limited to two. If the union has sufficient 
power to enforce obedience to its mandates, any restric- 
tion which limits the number of those who are brought 
up to the trade must exert a direct influence to raise 
the wages which are paid in this particular branch of 
industry. For suppose that those who are engaged in 
the manufacture of hats were freely permitted to take as 
many apprentices as they pleased, the number of journey- 
men hatters in the country would be very much increased. 
Let it be assumed that there would be twenty per cent, 
more journeyman hatters than there are now; under these 
circumstances, there would be a greater number of labour- 
ers competing fgr employment in the hat trade, and their 

S 



258 Manual of Political Economy. 



BOOK II. wages would consequently be reduced. The saving re- 
^—^^-1-' suiting from the lower wages will ultimately benefit those 
who purchase hats, because the price of hats would be 
reduced. The hat manufacturers would not be able to 
appropriate to themselves the saving which would accrue 
from the payment of a less amount in wages, because, 
when the cost of producing any commodity is reduced, its 
price is sure to be lowered in a corresponding degree; for 
people engaged in the same trade compete against each 
other for as large an amount of business as possible, and in 
their anxiety to undersell one another, they offer their 
commodities at a price just sufficiently in excess of the cost 
of production to leave them a profit ordinarily realised in 
trade. It therefore appears, that those who purchase any 
commodity are compelled to pay a higher price for it, and 
that the wages of the labourers engaged in its manufacture 
are artificially raised when restrictions are imposed which 
limit the number of those v/ho are permitted to be em- 
ployed in the particular trade. 
Such limit- We believe that such restrictions can on no grounds be 
attons are (defended : in the first place, any such interference with 

indefensible .-..". p ,i T i r> ,i 

on any the distribution 01 the labour 01 the country, amongst its 
ground. various branches of industry, introduces many most mis- 
chievous inequalities. The labour of which some employ- 
ments are compulsorily deprived is thrown, as a burden- 
some surplus, upon other branches of industry, and the 
wages in some employments are consequently as much de- 
pressed as the wages in others are raised. The members of 
a trades-union, when they usurp such powers, virtually con- 
fiscate to their own advantage a portion of the wages which 
would be paid to other classes of labourers, if the industry 
were unshackled by such arbitrary rules. Although this in- 
justice is striking, yet there still remains to be described a 
much greater wrong, which is inflicted upon those who are 
prevented by a trades-union from following the employ- 
ment they would select, if left to their own free choice. 



Trades-Unions and Strikes, 259 

There can be no riglit to which every human being has a ^^^k ir. 
more indefeasible claim, than that he should be freely per- > — '^~' 
mitted to use his labour as he pleases. The laws of a free 
country ought to secure to every man this right ; for, if it is 
denied, individual freedom at once ceases to exist. Now I 
conceive that such a right is denied, if a person is excluded 
by a trades-union from following a particular employ- 
ment. It is no excuse for the members of the union to say, 
Our trade is already overcrowded, wages are too low in it, 
and it would be disastrous if they should be still farther 
reduced by a great increase in the number of those apply- 
ing for employment : every man has a right to judge of 
such things for himself; he may wish to engage in the trade, 
because he has a particular capacity for it, and if he is arbi- 
trarily driven to some other employment, he is deprived of 
the advantages of the skill with which nature has endowed 
him. It would therefore seem, that trades-unions may inflict They in- 
upon labourers great social tyranny ; and it is not the la- '^afeaali 
bourers who alone suffer, for every class of the community classes, 
is more or less injuriously affected. These trades-unions 
may imperil the very existence of an industry in any par- 
ticular district: for the various restrictions imposed upon 
employers may so much increase the cost of a commodity, 
as to render it impossible for them to compete against 
others in the same trade, whose operations are not similarly 
impeded. Examples may be quoted which prove that some «"f^ ^''^'''c 
branches 01 mdustry have been driven irom certain localities 
by trades-unions. These societies have long been very instance of 

powerful in Birmingham, and their efforts were at one time f'^'^^^^W- 
. . . . . . ham 

chiefly directed against the introduction of machinery. 

These efforts were in a great degree successful, and con- 
sequently, when steam began to be generally applied, those 
trades which required much machinery settled in other 
localities, and the manufacturers of Birmingham are to this 
day in a great degree confined to those branches of industry 
which require comparatively a much greater amount of 

S2 



2 6o Manual of Political Economy. 

manual labour than machinery. Another example may be 
furnished by Sheffield. In this town, during the last few 
a,nd years, many most dreadful outrages have been perpetrated 

Sheffield, upon artisans who have refused to join the trades-unions. 
Now when these societies usurp such powers of social 
tyranny, they are sure to practise coercion upon the 
masters, attempting to control them in their business 
arrangements by all kinds of vexatious restrictions. The 
trade of Sheffield thus trammelled must inevitably decline ; 
for although the place may have special advantages for the 
industry which there flourishes, yet other localities, where 
masters and men are permitted to -act as they please, will 
be able to compete successfully against Sheffield. In 
corroboration of this opinion it may be stated, that a- 
successful steel manufactory has already been established 
in Manchester, and its promoters openly confess that they 
have been induced to select Manchester, in order that they 
may escape the influence of the trades-unions. If, more- 
over, these societies should increase in numbers and in 
power, so as gradually to embrace a large majority of the 
working classes, the industrial prosperity of the nation 
might be seriously jeopardised, since various branches of 
industry might not only pass from one locality to another, 
but might even leave the country. For we could not 
compete with foreign countries if our manufacturers are 
to be dictated to by their workmen with regard to the 
labourers who should be employed, the machinery that 
should be used, and the mode in which the business should 
be conducted. 
ly means of ' It may perhaps be asked. How can these trade societies 
exercimig a gxercise the influence they do, when everyone is aware that 

sociai ter- . . . 

rorism. the coercion they practise is not based on any legal sanc- 
tion? No one can doubt that the members of a trades- 
union commit a criminal act, if they attempt, in the slight- 
est degree, to interfere with any individual who may not 
belong to their society. It would therefore appear, that. 



Trades-Unions and Strikes* 261 



social terrorism is the source of their pawer ; for although book it. 

such outrages as those committed at Sheffield are excep- « '^—^ 

tional, 3^et a non-union man is subjected to so many petty 
annoyances that his life not unfrequently becomes a burden 
to him ; and employers are coerced in a similar manner, if 
they do anything contrary to the rules of a trades-union. 
Thus if a master engaged in some business, such as wool- 
stapling, where the trade society is all-powerful, should 
presume to employ non-society men, all his labourers 
who belonged to the trades-union would at once refuse to 
work for him, and he may in this way be subject to great 
loss and inconvenience. 

It is not, however, these regulations concerning the Thecorh- 

• , ^ 1 c j^ 1 ^ • ^ ^ 1 nection be- 

mternai arrangements oi a trade, which nave caused so ^^^^^ 
much public attention to be directed towards trades-unions trades- 
during the last few years ; but interest has been excited strihes is 
in these societies in consequence of their connection with intimate, 
strikes. The trades-unions have, in fact, endeavoured necessary. 
to regulate wages, and they apply their organisation to 
compel employers to agree to their demands. If, for 
instance, it is proposed to reduce the wages in some 
particular branch of industry where the majority of the 
men employed belong to a trade society, then, if the 
leaders of the society consider that the reduction ought 
not to be made, they issue an order that work should be 
discontinued rather than that the reduction should be 
accepted. If the reduction is still insisted on by the 
employer, the immediate consequence is a turn-out of the 
workmen, or, in other words, a strike. Now it is evident 
that a trades-union need not necessarily have the slightest 
connection with a strike, and, even if trades-unions did 
not exist, strikes might still be of frequent occurrence. A 
strike implies a combination amongst a large number of 
workmen, and such a combination is not possible unless a 
considerable majority of those engaged in any trade agree 
to act in unison. Such a combination as a strike requires 



262 



Manual of Political Economy, 



BOOK ir, 
CH. TX. 



Question 
whether 
combina- 
tions of 
icorTcmen 
can raise 
wages. 



cannot therefore exist unless the workmen submit to be 
^ governed by an organisation. The trades-unions supply 
this organisation, without which there cannot be complete 
unity of action. It is quite possible, however, to conceive 
that a trades-union may prevent a strike, and many of 
these societies have, as yet, never been connected with a 
strike ; still, as long as a great number of workmen in 
this country are warm advocates of the system of strikes, 
we may be quite sure that trades-unions and strikes will 
be intimately connected together. 

Since a strike requires combination, we have to enquire, 
when investigating the effect of strikes, whether workmen 
by combining can obtain higher wages. It can scarcely be 
disputed that they possess a perfect right to combine. The 
right may be, and has been, abused, and then, of course, it 
ceases to be justifiable ; but if employers are freely permitted 
to invest their capital to the greatest possible advantage, 
we conceive that the employed may equally claim to be 
allowed to obtain the highest wages they can for their 
labour. If, therefore, any number of them choose to form 
themselves into a combination, and refuse to work for the 
wages which are offered to them, they are, we think, as 
perfectly justified in doing this as capitalists would be if 
they refused to embark their capital because the investment 
offered was not sufficiently remunerative. Workmen, 
however, do an illegal and most mischievous act, which 
ought to be punished with the utmost rigour of the law, 
if they attempt to sustain the combination by force, and if 
they coerce individuals to join it by threatening to subject 
those who keep aloof either to annoyance or j)ersonal 
violence. We will not here stay to enquire whether strikes 
are generally maintained by an abuse of the power of 
combination; for we must first apply ourselves to the 
fundamental question which is the basis of the whole sub- 
ject, and consider the effects which can be exerted on wages 
by such a combination of workmen as a strike implies. 



Trades-Unions and Strikes. 263 

We must ask our readers to bear carefully in mind that, ^ook ii. 

if strikes increase the remuneration of the labourer, they > '^^-^ 

must in a corresponding degree diminish the profit of the The in- 
employer, unless he is able to sell the commodities he JJ^^JJ f^^^^ 
produces at a higher price, and thus compensate himself hnphj « _ 

r» ii • 1 ^ • ^ J.^ 1 •^ i i • x diminution 

lor the increased wages which the strike compels him to Qf^^^ofity 
pay his workmen. We will therefore, in the first place, 
assume that there is no such rise in the price of commodi- 
ties. This assumption narrows the enquiry, and leaves us 
the following simple question to answer — Can workmen 
appropriate to themselves by means of strikes any portion 
of their employer's profits? Now it has been stated, in 
previous chapters of this work, that the profits realised in 
each branch of industry approximate to a certain average 
rate; this rate varies from time to time; it is greater in 
one age than in another; but there is always a certain 
average rate of profit common to all trades, if ]3roper allow- 
ance is made for the various conditions which affect differ- 
ent branches of business. In asserting this we do not lose 
sight of the fact that one trade may be depressed whilst 
another is prosperous. If, however, commercial men be- 
lieved that, on the average of years, some particular busi- 
ness was extremely profitable, there would be a general 
desire to participate in these advantages, a large accession 
of capital would be quickly brought into the business, and 
the exceptionally high profits would be rapidly reduced by 
competition. If, on the other hand, some particular branch 
of industry should be made extremely unremunerative, in 
consequence of the employer's expenses being greatly in- 
creased without any counterbalancing compensation, those 
engaged in the industry would withdraw their capital from 
it as speedily as possible, in order to embark it in other 
more lucrative undertakings. It would therefore appear and there- 
that it is impossible for strikes permanently to raise ^^^^ i^terma- 
wages paid in any trade, unless the masters who pay these nent 
higher wages receive an adequate compensation for the 



264 Manual of Political Economy, 

BooKir. increased expense to which they are subjected. To prove 
' — ^^-— ' this, it is only necessary to observe that the whole returns 
in any trade must, after replacing capital, be divided 
between the employer and the labourer — i. e. between 
profits and wages — and that consequently it is physically 
impossible that any permanent rise in wages should take 
place without a corresponding diminution of profits. The 
gross profits would be diminished by precisely the same 
sum as that by which the wage-fund would be increased. 
The inevitable consequence of this would be the depression 
of the trade, the withdrawal of capital, and the reduction 
of the wage-fund itself — i. e. of the amount to be distri- 
buted amongst the labourers employed. It may perhaps be 
supposed, that if a combination of labourers succeeded in 
obtaining an advance of wages from a master, he could 
compensate himself by charging a higher price for the 
commodities which he produced, and if this were done, 
wages might be raised without encroaching in the slightest 
vnless the degree upon the profits of the employer. We have already 
mvntber of^ anticipated this case ; for it has been shown that a trades- 

laoourersts . . 

restricted union might undoubtedly raise the wages of a branch of 
timnmi i^^^ustry if the union possessed sufficient power to control 
the number of workmen who should compete for employ- 
ment in the trade. We, however, stated that if the wages 
were raised in this manner, the loss would ultimately fall 
not on the employers, but on those who purchased the 
commodities produced, which would be sure to advance in 
price. But if the wages of one trade were thus artificially 
increased, labour would soon be attracted from other 
employments, and this additional supply of labour would, 
sooner or later, reduce wao^es to their natural level. If 
trades-unions are permitted to prevent this free passage 
of labour from one employment to another, wages may 
permanently maintain an artificial advance; but trades- 
unions can only exert such an influence by resorting to a 
social tyranny, which is in every sense illegal and unjusti- 



Trades-Unions and Strikes. 265 

.fiable. It therefore appears that it is equally impossible book it. 
for the wages of any trade to be permanently advanced by .^3 \^^' . 
a combination, even although the employers should be 
temporarily recompensed by a rise in the price of the com- 
modities they produce. 

Although we believe we have proved that a strike can- Can strihs 

„x J.J ' x'j. ' r J. O'cdse wages 

not permanenUy raise wages, yet it remains lor us to con- ^g„^„o- 
sider whether or not a strike can exert any temporary effect rarily ? 
upon wages. Now we have previously remarked, that al- 
most every branch of industry is subject to great fluctua- 
tions. The losses which are incurred in times of depression 
are compensated by the high profits realised in the recur- 
ring periods of active trade. The position of the labourer 
is, no doubt, affected by these changes in his master's pro- 
sperit}^, for when trade is dull, wages are low; and, on the 
other hand, when trade is good, wages are sure to be high. 
But we think that labourers will more fully and more 
rapidly participate in the extra gains resulting from 
active trade, if they exhibit a power to form combinations. 
It is, we are aware, constantly stated that the interests of ^^'^ "'- 
the employer and employed are identical, and this pro- worhnm 
position is understood to imply that every improve- ^'^^ ^^^"' 
ment in trade must inevitably and immediately benefit are only 
the labourer equally with the master. Such a happv con- ^'fcwi«ca^ in 

.. . . xj../ tJie S€7tse 

summation is far from being realised by our present social inwMclitlie 

system ; for its gravest defect is, that there is no identity ^^^^^^^^s of 
P • ■, 1 1 11 11 oui/ers and 

01 interests between employers and employed, and as long sellers are 
as they are not attached to each other by any of the bonds 'i(^^^'^^^^c<^^; 
of a common pecuniary interest, we shall, undoubtedly, have 
to deplore the frequent occurrence of strikes and other 
unfortunate trade disputes. There is at the present 
time no more identity of interest between employers and 
employed, than there is between a buyer and seller. The 
seller of a commodity exerts himself to obtain the highest 
possible price for it, and the buyer, on the other hand, 
equally exerts himself to pay the smallest price. Buying 



2 66 Manual of Political Economy. 

BOOK II. and selling, therefore, necessarily imply a conflict of eflfort. 

. ^ — L. And are not employers and employed buyers and sellers? 

which is not For tlie labourer is as anxious to sell his labour at the 
rariur^^' ^^^^ possible price, as if he were disposing of some ordi- 
though true nary commodity ; on the other hand, the master, by en- 
^run.^ ^^^ g^oii^o ^is workmen on the lowest wages they are will- 
ing to accept, profits as much as he does by purchasing, on 
the most favourable terms, the materials which he may 
happen to employ in his industry. There is, therefore, 
an antagonism, instead of an identity of interests, between 
emplo3^er and employed. It must, however, be borne in 
mind, that this antagonism amounts to no more than that 
which exists between the buyer and seller of a commodity ; 
for it would be most erroneous to conclude that the in- 
terests of employer and employed were opposed to each 
other in the sense that the one profited by the other's mis- 
fortunes. The reverse of this is, doubtless, true in the long 
run. The prosperity of each party to the bargain will, in 
some degree, ultimately be shared by the other ; but it is 
not the less true, that at the instant of making the bargain 
the interests of the two parties are temporarily opposed. 
Our previous remarks, indeed, refute the idea of a per- 
manent antagonism of interests ; for it has been repeatedly 
stated that, from the employer's profits, the capital is ac- 
cumulated out of which the Avages of the labourers are 
paid. Any circumstance, therefore, which permanently 
cripples the resources of the employer, must prove disas- 
trous to the labourer, because it would diminish the fund 
from which his wages are paid; in a similar way, although 
the bargain which takes place in the ordinary trans- 
actions of buying and selling implies rivalry of interests, yet 
any general misfortune which might happen to the selling 
class will, to an equal extent, affect, prejudicially, the in- 
terests of the purchasers, because they would have to pay 
„ 7, a higher price for the goods they may desire to purchase. 

may at We may then conceive many cases in which the buyer is 



Trades-Unions and Strikes. 267 

placed in a relatively worse position than the seller ; in book ii. 
fact, the buyer may suffer, because, in adjusting the bar- v — '^ — L. 
gain, the seller may possess superior opportunities. To times have 
illustrate this we may quote the example of adulteration. ^P^^]^^ «^- 

•^ ^ •*• vantages 

The person who purchases a pound of tea cannot form a over buyers. 
correct estimate of its exact quality; the grocer, there- 
fore, if so inclined, can presume upon this ignorance, and 
thus a far greater price than ought to be paid is fre- 
quently ffiven for an adulterated article ; it is difficult to 
over-estimate the extent of the loss which is in this 
manner incurred by those who deal at many of the small 
retail shops. In wholesale transactions, however, this in- 
equality in adjusting the bargain of buying and selling 
does not exist, because, as a general rule, each party to 
the bargain has equally good opportunities of forming a 
correct estimate of the real value of the commodity which 
is bought and sold. Since, therefore, we have shown This may 
that the eno^aofinsc of hired labourers differs in no essen- /' *^'"^ ^^ , 

^ o Q ^ ^ ^ buyers and 

tial respect from any ordinary transaction of buying and sellers of 
selhng, the question is naturally suggested. Are labourers ^le^^tnlju 
as likely to make a good bargain with an employer if hy comU- 
they possess no power of combination, as they are if their ^^^l^^^l 
power of combination is so great that many thousands 
will act in perfect unison, and will refuse, during many 
consecutive months, to work for the wages which are 
offered to them. In answering this question I cannot, after 
great deliberation, resist the conclusion, that such a power 
of combination may secure to the labourers higher wages 
in certain special states of trade. I will proceed to state 
the grounds on which I base this opinion. It may very it is said 
probably be urg-ed at the outset, that strikes have almost *\^^ svnkcs 

. . ^ , ^ akvafjs 

invariably failed to secure for the workmen any of the/az7. 
demands which they have put forth. It frequently hap- 
pens that those who join a strike endure the most severe 
hardships, and cause an enormous sacrifice of money. 
They not only cripple their master's resources, but they 



268 



Manual of Political Economy. 



They gene- 
rally pro- 
dace great 
suffering, 



hut do not 
invariably 
fail. 



exliaiist tlieir own savings, and contributions are levied 
from other workmen, which they can ill afford to spare. In 
the great strike of Preston, in 1854, 17,000 men were on 
strike for thirtj^-six weeks; the strike cost the operative 
class at least 250,000^., and after the most terrible distress 
had been borne with a calm courasfe and a noble resiafna- 
tion that won the admiration of all, the workmen resumed 
work, without obtaining any part of the demand for which 
they originally struck. The result of the recent great strike 
in the building trade was equally disastrous. I am there- 
fore fully desirous to recognise the great sufferings which 
strikes entail upon the labouring classes. And perhaps I 
need scarcely stay to expose the fallacy, that the labourers 
receive some compensation for these misfortunes, because 
they succeed in entailing equal losses upon their masters. 
The sacrifice of the master's property only serves to aggra- 
vate and to perpetuate, during some years, the misfortunes 
of the labourers, since any sacrifice of the master's pro- 
perty diminishes his capital; he may therefore have a 
smaller fund to distribute in wages amongst his labourers, 
when they resume work. But such cases of disastrous 
failures as those we have mentioned do not afford a com- 
plete proof that labourers can never be benefited by a 
power of combination. Moreover, although strikes have 
completely failed in the majority of instances, yet we must 
not forget that, on many occasions, strikes have been per- 
fectly successful, as far as the labourers are concerned*. 

* We select the following instances of successful strikes : — 

In the year 1836 the workmen of Messrs. Seward and Co., engineers, 
London, struck for the reduction of the number of working hours from ten 
and a half to ten hours a day. The workmen of the other employers in 
the neighbourhood subscribed for the assistance of Messrs. Seward's men ; 
the battle was fought, and the result of it was that the men were entirely 
successful. 

In 1848 the operative builders struck for a cessation of work on Saturdays 
at 4 o'clock. They were successful. 

In the same year they struck for an advance of sixpence per day. They 
obtamed their demand. 

In 1859 the shipwrights of the T3me and Wear struck for an advance of 
wages; and, as on many previous occasions, they succeeded. 



Trades-Unions and Strikes. 269 

We sliall however be deceived by fallacious reasoning if, book h. 
adopting the method of investigation usually pursued, - — ;, — 1^ 
we make an estimate of the great outlay which unsuccess- 
ful strikes have involved, and contrasting this outlay with 
the comparatively small gains which successful strikes have 
brought to the labourers, we then assume that a conclusive 
argument has been supplied on the subject. The frequent Tliefact 
failures of strikes may be, in a great degree, explained by frequmUy'^ 
the somewhat remarkable fact, that the workmen of sifailis 
trade have generally struck when it was in such a condition 'l^taUeto ** 
as to prevent a combination having the least chance oi their taUng 
exerting any influence to increase wages. When trade '^^\r^deloas 
declining, and the employers' profits are diminishing, work- ^^ « ?'«'^ 
men not unfrequently at once threaten to strike, if a re- ^^ ^ ''' 
duction of wages is proposed. But under such circum- 
stances the employers are fairly entitled to reduce their 
wages ; there is no reason whatever why their profits should 
bear the whole brunt of the depression in the trade. 
When profits decrease, there is a smaller aggregate amount 
to be distributed amongst the employers and the employed ; 
and it is both reasonable and equitable, that the amount 
allotted to each should be diminished. Moreover, when a 
trade is dull, the masters are in the best condition to 
contend with a combination; for they may well say. Our 
profits are so much reduced by this depression of busi- 
ness, that it is a matter of little conseqaence to us if 
those we employ should choose to abstain from work 
for a time. Labourers, however, forget this, and still 
clinging to their unfortunate prejudice against capital, 
they are always more prone to believe that wages are 
reduced rather by the tyranny of the capitalist, than by 
natural causes over which he has no control. Hence, when 

In 1859 the building trades of Dublin struck for an advance of two shil- 
lings a-\veek. After a brief struggle the masters complied with the demands 
of the men. 

In the same year, 1859, the Northampton boot and shoe-makers struck 
successfully for an increase of wages. 



2 70 Manual of Political Econoiny. 

trade is dull, strikes are frequently organised, in order 
to resist this imaginary tyranny; and at such a period, 
disastrous failure must be the inevitable result of a com- 
bination. 
Could tliey Let US next however enquire whether the workmen can 
It advan- jg^-j^yg ^^j^y advantas^e from combininsr when trade is good, 

tageous to -^ ^ ^ , ° o ^ 

the work- and high profits are realised. It is too often forgotten, that 
men if ^ strike on a large scale necessarily implies that a combina- 

made when ^ * _ . 

troAe was tion must have previously existed amongst the employers ; 

^^^ ' for a strike is essentially a- protest against some definite act 
emanating from the employers in a particular trade. Either 
a reduction of wages may be objected to, or a protest may 
be made against the number of hours during which the 

A striJce workman is compelled to work. But a definite act cannot 

necessarily ^^ performed by such a numerous body of men as the 

toiipkes a ^ 'J ... 

combination masters of a trade, unless there is unity of action amongst 
em^lotrs "t^^™^ j <^i'' i^ other words, unless they combine. When all 
the workmen of a trade combine over a considerable area, 
in order to resist a proposed reduction in their Avages, it 
shows that the reduction is general, and therefore must 
have been made as the result of an agreement amongst a 
great number of masters. In fact, we need not multiply 
reasons to prove the existence of these combinations 
amongst employers; for every commercial man is aware 
that, in all our great branches of industry, the wages to be 
paid are settled by a general agreement amongst the 
employers in each locality. In two adjoining mills in 
Manchester, it will never be found that different wages are 
paid for doing the same kind of work; any alteration in 
the rate of wages is always preceded by a meeting of the 
masters, at which they not only decide the particular day 
when the change shall commence, but also fix the exact 
amount of either the proposed rise or reduction in wages. 
We must therefore assume that, in those trades where 
strikes occur, there is in each locality so much combination 
amongst the employers in each distinct trade, that every 



Trades-Unions and Strikes. 271 



individual master pays the same rate of wages and controls ^^^k ir. 

Ills workmen by the same general rules. Having establish- ^ 1 — 1^ 

ed this fact, let us, in the first instance, assume that there // this %cere 
is no power of combination amongst the employed. In ^^fcombi- 
order to illustrate our argument, let it be farther assumed, nation 
that some branch of manufacturing industry is extremely ^,orJcmev 
active, and that unusually large profits are being realised. wagesmUjU 
The individual workman might very naturally think that, (/^^-Jf, 
out of these large profits, his master might afford to pay 
him higher wages. The workman might therefore go to 
his master and say, Your trade is now so good, that I 
think I ought to receive better wages. The master might 
reply. If you wait patiently, you will find that your wages 
will be raised; for you know that we always pay you 
higher wages when our trade is good. By and by we, the 
masters, wiU no doubt meet together, and you may depend 
upon it that we shall then decide upon a rise of wages. 
This no doubt is perfectly true, but the workman might 
rejoin, Why should I wait until you choose to arrive at 
this joint decision? if you can afford to raise my wages, 
why don't you do so at once? The master would very 
naturally persist in his refusal; for he would feel confident 
that the workman, being a poor man, could not live with- 
out employment; and as the wa.ges paid in the trade are 
uniform, the workman would have no chance of obtaining 
higher wages from another employer. Let us now, how- But if op- 
ever, enquire whether, under the same conditions of trade, ^^J^ ^ l^^^^ 
a different result will not follow if the labourers have Unation 

. r 1 • i • j_ j_i 1 TT ivJien trade 

power to form a combination amongst themselves. Upon ^^^ 
this hypothesis, when trade was flourishing and iprofits flourishing, 
were high, it would not be the individual workman who probably 
would demand higher wages, but the demand would come ^'^f '^ore 
from those who were the delegates and representatives of ^^nj^^ ^ ^ise 
combined thousands. These representatives might put ^^ i^ro/i^s. 
forward the following claims: — We are aware that you, 
the masters, are now realising extremely large profits; we 



2 72 Manual of Political Economy, 



BOOK II. know the price of the raw material, and we also know the 

CH. IX. . I . 

' ^ — ' j)rice at which you sell your manufactured goods; we can 

therefore calculate with accuracy what your exact profits 
are. We have made this calculation, and in our opinion 
you can afford to raise our wages. The masters might 
state reasons why they were not prepared to make such an 
advance in wages; possibly the workmen might be satis- 
fied with these reasons ; but if they were not so satisfied, 
then they might say, We consider that w^e are not obtain- 
ing a fair price for our labour, and we therefore refuse to 
work. They might further urge, that this resolution is 
neither strange nor unjust; for if you, the masters, cannot 
obtain a fair price for your goods, you refuse to sell them. 
We are aware of the sacrifice we shall make, and the loss 
which we shall incur; but great as the sacrifice may be, 
we are prepared to meet it, for we are provided with funds 
which will enable us to do without work for months. The 
masters would know that they themselves would surfer a 
most severe loss, if such a determination were carried out ; 
for their business would be stopped at a time when it is 
most profitable. They would therefore have every induce- 
ment to grant their workmen what they claimed, if the 
demands were really justifiable. 
Though a The workmen might, it is true, as they have very 
combliation fj^'^q^ently done, make a demand for these higher wages 
is liable to when there was nothing in the state of trade to justify an 
therefore ^^vauce. If, howover, they should do this, they would 
gives some commit a most grievous error, the consequences of which 
toworhnen "would be even more serious to themselves than to their 
employers. In my opinion, therefore, although the power 
of combination amongst workmen may be liable to gross 
abuse, yet on the other hand, when this power is legiti- 
mately and intelligently used, the workmen are always 
enabled to dispose of their labour on the most favourable, 
terms. We have previously said that hiring labour is like 
any ordinary transaction of buying and selling. A bargain 



't7ia' 



Trades-Unions and Strikes.' 273 

is, in fact, implied, and to every bargain there must be book ii. 
two parties. When labour is bought and sold, the bargain . — ;, \' , > 
is adjusted by the employer and the employed. If the 
employers possess a power of combination and the labourers 
do not, then we think that one party has a chance of ob- 
taining a better bargain than the other ; but if this power 
of combination is exerted by both, then they are both placed 
in a position of perfect equality. 

The conclusion just established may perhaps appear Nature of ' 
extremely disheartening, for it may seem to show that J^ 6 af'"^ 
strikes, with all their attendant misery, must become a pectedfrom 
permanent part of our social system if labourers are ^^f^l^^^ 
benefited by combinations. We, however, take a far more tion 
encouraging view of the subject; for we consider the present ^^]!^^j^ 
unfortunate disputes between employers and employed to 
denote a transition towards economic relations far more 
satisfactory, and far more advantageous to the nation at 
large. This opinion is based upon the belief that the 
great strikes which have recently taken place provide the 
most complete security against their future occurrence. 
When the existence of a power of combination amongst 
the labouring classes has been fully demonstrated, it will 
exert its influence potentially, or, in other words, the 
w^hole influence will be exerted without the power being 
brought into action. It is in this manner that national 
armaments produce their effects. Our navy may be a 
complete protection to our shores, although it does not 
fire a hostile shot for a century — our shores are protected, 
because it is known what our navy can do if it is required 
to put forward its power. In a similar way the workmen 
may obtain all the results which a combination can give 
them, without ever assuming towards their employers any 
such hostility of attitude as a strike implies. When this 
power of combination is fully recognised, all that can be 
secured by it must be peacefully conceded ; and, therefore, 
instead of enmity being perpetuated, increased harmony 

T 



between 
labourers 
and capi- 
talists. 



274 Manual of Political Economy, 

and good-will will be guaranteed. The workman will 
become a participator in his master's prosperity ; and if he 
shares in his prosperity, he will learn to suffer with him in 
time of adverse trades. The workman may thus be gradually 
taught one of the most valuable of all lessons, namely this, 
that capital is not a tyrannical power which oppresses him, 
but is the source from which he obtains his livelihood. 
Tcndcnc:/to jf^ moreover, it is true that the power of combination 
^community causes the workmen more completely to participate in 
of interest their master's prosperity and adversity, it is evident that 
different relations between employers and employed are 
introduced. There will then be more identity of pecuniary 
interest between masters and men, and they will more 
completely become fellow-labourers or partners in the 
production of the commodities upon which their joint 
labour has been engaged. If the present want of sym- 
pathy between employers and employed could be replaced 
by such a co-partnership, it would be one of the great- 
est social reforms that has ever been introduced. The 
employers would be abundantly recompensed for the 
portion of their profits which they might resign on their 
workmen's behalf by the increased efficiency of their labour ; 
for it is difficult to over-estimate the extent to which the 
efficiency of labour is diminished by that listlessness and 
want of energy which must always characterise the labourer 
who works for ordinary hired wages"'^ Such an one has 

* Numerous cases might be quoted which would prove that the employer 
is abundantly compensated when such a co-partnership is created between 
him aiKl those whom he em.ploys. We cannot do better than allude to the 
experiment that was tried by M. Leclaire, a house-decorator of Paris. The 
experiment, though well known, is particularly important, because its results 
have been verified by the most accurate testimony. M. Leclaire employed 
about 200 workmen, and the carelessness and apathy of his men subjected him 
to constant loss and annoyance. He therefore resolved that he would endea- 
vour to make the labour of his men more efficient by giving them some 
pecuniary interest in the work in which they were employed. He conse- 
quently assembled them together, told them that he would continue to pay 
them the customary wages of the trade, and at the end of the year would 
distribute amongst them a certain share of the profits which had been 
realised. M. Leclaire emphatically affirms that the plan was eminently sue- 



Trades-Unions and Strikes. 275 

no interest in the work in which he is employed ; his only book ir. 
motive, as far as pecuniary considerations are concerned, ^ ' '.^—^ 

cessful, and that he was in a pecuniary sense abundantly recompensed for 
the share of his profits which he gave to his workmen. Their habits and 
demeanour were greatly improved, and, even when not at work, they showed 
increased respect for themselves, as well as for their employer, in all the other 
relations of life. 

As anotlier example, it may be mentioned that the Paris and Orleans 
Railway Company distribute a certain portion of the profits realized amongst 
the working staff of the railway, and it is unanimously affirmed by the 
Directors that the plan succeeds admirably. 

It appears at the time when the second edition of this work is passing 
through the press, that these co-partnerships between employers and em- 
ployed are being much more rapidly and extensively introduced than could 
have been anticipated from our a priori reasoning. The proprietors of 
some of our largest commercial concerns ai*e changing their establishments 
into joint-stock companies; they retain the largest portion of the shares in 
their own possession, and the remaining shares are then offered to those 
who are employed either as managers, foremen or workmen. The Messrs. 
Crossley of Hahfax, Yorkshire, are the owners of probably the largest carpet 
manufactory in the world. They propose to change their vast establishment 
into a joint-stock company, the capital of which will be £1,650,000. The 
Messrs. Crossley retain in their own possession shares which represent four- 
fifths of this capital, the remaining shares they offer to the 4,400 workmen 
whom they employ ; every labourer will thus have an opportunity of be- 
coming a partner. In order still further to explain some of the plans of co- 
partnership which are proposed to be adopted, we wdll briefly describe a 
scheme wliich has been most admirably devised by the Messrs. Briggs, who 
are large coal-proprietors at Methley, near Leeds. They propose to dispose 
of their coal mines to a joint-stock company, the capital of which, £135,i.K;0, 
is raised by 9000 shares of £15 each. The Messrs. Briggs will retain two- 
thirds of the whole number of shares, and the remaining one-third will be 
first offered to those who are employed at the mines. The workmen will 
be able to have on the directory some of their own body to represent them. 
It is further proposed that if the profits should exceed 10 per cent, after 
Setting aside a fair amount to reimburse capital, one-half the remaining 
surplus shall be distributed amongst the labourers, and that each individual 
share of this bonus should be proportioned to the aggregate wages which he 
has earned. A most satisfactory cooperation between capital and labour 
will thus be secured. The Messrs. Briggs, who may be regarded as men of 
great experience, affirm that the plan even as a commercial experiment is 
likely to prove eminently successful. They say with great truth, that laboiu-- 
ers who own the capital and participate in the profits realised will never 
resort to strikes, and those unfortunate disputes which have recurred with 
such disastrous frequency in the coal trade will thus be prevented. Messrs. 
Briggs also state that labour in a coal mine can never be properly superin- 
tended ; the portion of profits which may be distributed as a bonus amongst 
the labourers will stimulate their energy, and their industry will thus become 
more efficient. The important consequences which would follow if this plan 
should be successful cannot be over-estimated ; the great economic question 
of the day would be solved, for there must always be much that is unsatis- 
factory about our national industry as long as there is no co-partnership 
between capital and labour. 

T2 



276 Manual of Political Economy. 

BOOK II. is to do just enough work, and to do it just sufficiently 
» ^^'J^ well, to prevent his master finding fault with him. The 
highest efforts of the workman are therefore not called 
forth, and all his labour has to be most carefully superin- 
tended. These are grave defects in our national economy 
which have been again and again recognised; any in- 
fluence, therefore, must be most beneficial which should 
exert a tendency to make the employers and the employed 
feel that they are not merely rivals adjusting a commercial 
bargain, but that they are fellow-labourers, by whose 
united efforts wealth is produced. 



277 



CHAPTER X. 

ON COOPERATIVE INSTITUTIONS. 

VARIOUS plans and schemes for obtaining a different book ii. 
distribution of wealth are constantly supported, with - ^^; ^1 - 
more or less favour, by the labouring classes. In the last importance 
chapter, we described two of these plans; namely, trades- ^/ ^^^ p^' 
unions and strikes ; and we endeavoured to trace, with principle : 
strict impartiality, the evils and the benefits which they 
might confer upon the labouring classes. During the last 
few years, the rapid extension of cooperative institutions 
has excited as much attention as trades-unions and strikes. 
In the last chapter we had to refer to much that was un- 
satisfactory and distressing; we, however, discuss the sub- 
ject of the present chapter with unmixed pleasure, because 
we believe that wherever the principle of cooperation is 
carried into practical effect, the labourers enjoy a far more 
favourable distribution of wealth, and that this advantage 
is moreover secured to them without the slightest suspicion 
of the least injustice having been inflicted on any other 
class. 

It has been frequently stated, that wealth cannot be it implies a 
produced without the application of capital and labour; the J*^"^" ^^" 
economy of our country is such, that the capital and capital and 
labour are seldom supplied by the same individuals. ^"*^^^- 
Hence wealth is in this country usually produced by the 
exertion of two distinct classes, who are called employers 
and employed. The wealth, therefore, which is produced 
■ by their joint exertions belongs to them, and is dis- 



278 Manual of Political Economy. 

BOOK II. tributed between them. The employers supply the capital, 
. ^^- J^- . and the share which they obtain is termed their profits; 
the remaining share is apportioned in the form of wages to 
the employed, who supply the laboLir. Now the amount 
of these shares is regulated by definite laws, which pri- 
marily depend upon a ratio between capital and popula- 
tion. But although such may be regarded as a description 
of the present economic condition of this country, yet it 
is manifest that there need not necessarily be two distinct 
classes termed, respectively, employers and employed; for 
the labour and the capital required to produce wealth 
might be provided by the same set of individuals. If this 
were done, those who labour would enjoy as their own 
property all the wealth that was produced, because no 
portion v/ould have to be allotted in the form of profits to 
a different set of individuals who supplied the capital. It 
is therefore manifest, that if the capital required in any 
industry is supplied by the labourers who engage in it, 
employers and employed are then merged into one 
class, and capital and labour are said to cooperate. Such 
an union of capital and labour defines what is termed the 
principle of cooperation. 
Origin of We will, in the first place, describe the origin and 
tlce m-_ oTowth of the cooperative movement in Enofland ; because 

omrative ^ , -^ , . •. . . 

7novement we think that such a description will throw much light 
m England. -^pQ^^ the oxact nature and scope of the benefits to be 
derived from cooperation. Like many other social move- 
ments that afterwards have assumed permanent import- 
ance, the principle of cooperation was first carried into 
practical effect in this country in a form so humble as 
scarcely to attract a passing notice; and perhaps the ex- 
tension of cooperation has been so extraordinary, because 
its development has been assisted by no extraneous aid. 
The cooperative movement in England was first com- 
RocMale. menced in Rochdale. About the year 1844, a few working 
men in that town^ suspected, and no doubt justly so, that 



On Cooperative Societies. 279 

they were paying a high price for tea, sugar, and other ^^ok ir. 
such articles, which they at the same time believed were ■ — ^-^ 
not free from adulteration. They therefore said, 'Why Cooperative 
should we not club together sufficient, amongst ourselves, ^ ^^^' ■ 
to purchase a chest of tea and a hogshead of sugar from 
some wholesale shop in Manchester?' This they did, and 
each one of their number was supplied with tea and sugar 
from this common stock, paying ready money for it, and 
giving the same price for it as they had been charged at 
the shops. When all the tea and sugar had been thus sold, 
they agreed to divide the money which was thus realised, 
amongst themselves, in proportion to the capital which 
each individual had subscribed. They did not expect to 
secure any considerable profit; the object they had in view 
was not so much to obtain a good investment, as to avoid 
purchasing adulterated articles. But they found, not a 
little to their surprise, that a very large profit had been 
realised. The great advantage of the plan became self- 
evident, for not only were they provided with a lucrative 
investment for their savings, but they obtained unadulter- 
ated tea and sugar at the same price as they had been 
previously obliged to pay for these same articles when their 
quality was deteriorated by all kinds of adulteration. A 
fresh stock of tea and sugar was, of course, purchased. 
Other labourers were quickly attracted to join the plan, 
and subscribe their savings; soon the society was suffi- 
ciently extended to justify them in taking a room, which 
they used as a store, and the success of the plan fully kept 
pace with its enlargement. 

In 1856, this society, now become famous as the Roch- Pror/re$>< of 
dale Pioneers, possessed a capital of about 12,900/^. The 2,f^e''^'^' 
business was not long restricted to articles of grocery ; bread. Pioneers. 
meat, and clothing were all sold on the same plan. Their 
capital so rapidly increased, that they were soon enabled to 
erect expensive steam flour-mills ; and a supply of pure 
bread, as well as unadulterated tea, was thus insured. During 



28o 



Manual of Political Economy. 



BOOK II. 
CH. X. 



Their 

Jinancial 

success. 



tlie last few years, tliis Pioneers' Society has attracted 
frequent public attention; for it has gradually grown into 
a vast commercial institution, embracing a great variety 
of trades. At the present time its capital is 32,000?., the 
annual amount of business done is 170,000?., and the profits 
realised are twenty per cent. The general management 
of this society, and the mode in which the profits are 
distributed, are both most excellently arranged. A ready 
money system is so scrupulously adhered to, that even a 
large shareholder cannot make the smallest purchase on 
credit. The managers of the business are chosen by the 
general body of shareholders, and in almost every case a 
most admirable selection has been made. The accounts 
are made up quarterly, and placed before a general meeting, 
London accountants have audited these accounts, and they 
express an unanimous opinion, that no business in the 
country is better conducted. With regard to the distri- 
bution of the profits, a sufiicient sum is first allotted to 
pay a dividend of five per cent, on the capital ; the re- 
maining profits are divided according to the following plan. 
Every person, when he purchases goods, receives one or 
more tin tickets, on which is . recorded the amount of his 
purchases. At the end of every quarter, each person 
brings these tin tickets, which form a record of his aggre- 
gate purchases, and the remaining profits are distributed 
in proportion to the aggregate amount which each indi- 
vidual has expended at the store. Thirteenpence in the 
pound is the average amount which in this manner is. 
received as a drawback. 
Its causes. We will now proceed to consider the causes which have 
contributed to the remarkable finanical success of this 
cooperative society, and we will then explain some of the 
special benefits which such a society confers upon the 
labouring classes. 

The ready money system which is invariably adopted 
by these societies has probably promoted their prosperity 



7t is car- 
ried on on 



On Cooperative Societies. 281 

more than any other ckcumstance. All bad debts are book 11. 

thus avoided, and when credit is not given, a certain l-L^ 

amount of business can be transacted with much less the ready 
capital than would be required if large sums were locked ^^y^l^j^^ 
up in book-debts. Under a ready money system, the same 
capital may perhaps be turned over twenty times in the 
course of a year, and if one per cent, only is realised upon 
each transaction, the capital will secure an aggregate profit 
of twenty per cent, in the course of the year. When goods 
are sold for ready money, the}^ can also be bought for 
ready money from wholesale dealers. This is always a 
guarantee that the purchases will be made on the most 
favourable terms. Again; the shareholders of the society 
form a nucleus of customers, and therefore, directly busi- A sufficient 

1 , • X r X 1 • • 1 nuviher of 

ness IS commenced, a certain amount 01 trade is insured, customers is 
If an individual commences a business, he must attract secured. 
customers, either by advertising, or by costly shop fronts ; 
he is compelled to conduct his business in crowded 
thoroughfares, where rents are extremely high ; but a 
cooperative society is saved all such expenses as these ; 
its shareholders are its customers ; it therefore need not 
advertise, it does not require a showy building, for its 
position is rather in the centre of the homes of the labour- 
ing population. These and other advantages sufficiently 
account for the great profits which have been realised, not 
only by the Rochdale cooperative store, but by a great 
number of similar societies, situated in almost every part of 
the country*. There are, how^ever, some counterbalancing 
disadvantages, which it will not be advisable to pass by jt Jms the 
unnoticed. Now it is manifest that such a cooperative ^^^sadvan- 

tagethatthe 

store or shop as that we have been describing resembles, 
in many respects, an ordinary joint-stock trading company. 

* A recent number of a monthly journal called the 'Cooperator' contains 
intelligence from Cooperative Stores in the following towns: — Aberdare, 
Banff, Blackburn, Burnley, Cleckheaton, Coventry, Dover, Hemel-Hemp- 
stead. High Green, Huddersfield, Hurstbrook, London, Manchester, Middle- 
ton, Newmarket, Norwich, &c. 



282 Manual of Political Economy. 

BOOK II. Many of the difficulties with which the joint-stock principle a 
—^^^^^-1^ applied to trade has to contend were stated in a previous * 
manager of chapter, and it is evident that many of the same difficulties 
the stoTx IS ^^y impede the progress of a cooperative store. For in- 
ciently in- stance, the manager who is paid by a company is rarely 
terestcd. ^^ energetic, so skilful, and so generally efficient as the 
individual owner of a business. Self-interest stimulates 
the latter to exert himself to the utmost; but no such 
motive acts on one who is paid by a fixed salary. This 
difficulty has been often got over by making the remunera- 
tion of a manager depend partly on the profits realised; 
and men are occasionally found who will exert themselves 
as much when managing the affairs of a company as if they 
were conducting a business of their own. Some of the 
This defect defects which belong to the joint-stock system are very 
^t^^Tdli curiously illustrated by the detailed accounts of the Roch- 
the superio- dale store. It is shown, for example, that the business done 
nty of the ^^ ^jj^^g store in grocery amounts to at least ten times the 
store to the business done in articles of clothing, and in every other 
drapery cooperative society as great, or generally a greater disparity 
is shown in the amount of business transacted in the 
grocery and drapery departments respectively. Now there 
must be some cause for this inequality, for it incontestably 
proves that the labouring classes willingly purchase from 
a cooperative store all the grocery they require, whereas 
they prefer to buy all articles of clothing from the ordi- 
nary retail shops. The reason why they do this may be 
readily explained. A man, when purchasing an article of 
clothing, likes to employ his own taste and judgement in 
selecting it, and he is therefore glad to have as large a 
stock as possible to choose from; this he thinks he does 
not secure if he restricts himself to one single shop. The 
success, therefore, of a draper or clothier must mainly 
depend upon the skill with which he consults the tastes of 
his customers. He must consequently exercise the most 
constant vigilance with regard to all kinds of petty details, 



On Cooperative Societies. 283 

and this vigilance and care can seldom be expected from book ir. 
one whose full energy is not stimulated by feeling that he - ^^^■^ ^' . 
is the owner of the business. On the other hand, however, 
a person when purchasing grocery cannot exercise his own 
judgement, but is entirely in the hands of the grocer him- 
self What, therefore, the poor especially require when 
they buy their tea and sugar is, the security that they 
obtain an unadulterated article. This security they believe 
they can have by resorting to a cooperative store, and 
hence, when one of these societies is first established, its 
business should for some time be almost entirely restricted 
to selling grocery, and other articles of food. After a time, 
various other trades, as has been done at Rochdale, may 
with great advantage be embraced. 

The advantages which the working classes derive from The bnj)or- 
a cooperative store are very apparent. In the first place, afordLu 
it provides them with the most eligible investment for the worUng 
their savings. This is most important, because the absence ^goodimest- 
of good opportunities for investing small savings acts most mentfor 
powerfully to increase the improvidence of the poor. ^*^^^^^' 
Even the middle and upper classes, whose superior edu- 
cation gives them prudence and foresight, are very much 
influenced in the amount they save by the profit which 
they believe would be realised on their capital. Hitherto 
the savings'-bank has been the only investment which, as 
a general rule, has been open to the working man. Now 
the ordinary English labourer must make many severe 
sacrifices to save 50^., and if this amount is placed in the 
savings'-bank, the labourer obtains an annuity not ex- 
ceeding thirty shillings a year, as his reward for self-denial 
and prudence. If old age or sickness compels him to 
cease work, his position is scarcely improved at all by the 
money which he had saved. If he had been improvident, 
and saved nothing, he would have received parish allow- 
ance ; but the poor-law guardians perform their duty 
when they grant just sufficient relief to enable a man to 
live ; the labourer, therefore, who possesses an annuity of 



284 Manual of Political Economy. 

BOOK II. thirty shillings a year will obtain from his parish, if he 
. ^^-J ^- . requires relief, thirty shillings a year less than the man 
who has recklessly spent everything that he has received. 
Under these combined discouragements, it is not surprising 
that our labouring classes have been extremely improvi- 
dent. No labouring man, in fact, has ever had definitely 
placed before him the prospect that he would be able 
himself to employ his savings as capital, and enjoy the 
profits arising therefrom. Our labourers, therefore, could 
never be cheered with the hope of improving their social 
position, for they must have seen that at least 99 out of 
every 100 of those whose parents are hired labourers, 
always remain in the same condition. Now it is evident 
that, as far as the investment of money is concerned, such 
cooperative stores as those we have described afford the 
labouring classes opportunities for obtaining profits which 
And thus they never possessed before. We shall moreover presently 

fjivmgtkem "^ \ . . . , , t i 

'theineans, show, that the Cooperative prmcipie, when applied to trade 
of rmng in ^.^^ manufactures, enables the labourer to support his 

position. . . , , . . T - . , . *- -^ 

industry with his own capital, and m this manner to rise 

from the mere status of a hired labourer. The figures we 
have already quoted sufficiently prove the eligible nature 
of the investment which is provided by a well-managed 
cooperative store ; for the profits realised at the Rochdale 
store not only provide a dividend of five per cent, on 
capital, but also enable a drawback of Is. Id. in the 
pound to be paid, on the amount of each customer's pur- 
Other ad- chases. The labourers, moreover, obtain unadulterated 
cooperative articles at the ordinary retail prices. And they are in another 
stores. -^ay greatly benefited by dealing at a cooperative store, for 
these establishments give no credit; and nothing has been a 
greater bane to the working man than the facility with 
which he is permitted to get into debt. He is thus en- 
couraged in extravagance, and the shop to which he is in- 
debted has the power to extort from him very high prices, 
for inferior articles. 
The labourers derive from these cooperative societies 



On Cooperative Societies. 285 

other advantages of no less importance than those pecuni- book n. 

ary benefits which we have been just describing. There ■ ^ '.., 

can be no doubt that these societies promote a most Thepro- 
healthy social intercourse between workmen ; for at frequent "f^^l^J^ ^^ * 
meetings the shareholders consult each other upon matters social inter- 
of business ; they have to show their discrimination in ^''"*'^^- 
selecting the proper persons to be managers ; and, in fact, 
the experience of the Rochdale store proves, that a co- 
operative society can succeed in carrying out many a social 
improvement which would not otherwise be introduced. 
Thus two and a half per cent, of the profits realised at 
Rochdale support an excellent reading-room and library, 
which the shareholders, as well as their wives and families, 
are permitted to use gratuitously; the society organises 
excursions, and often performs some united work of 
charity : not long since, its members presented a magnifi- 
cent drinking-fountain to their fellow-townsmen. A co- 
operative store may, moreover, become a particularly 
powerful agent in benefiting the working classes, because 
it can be conducted on the smallest possible scale. The 
experiment can be made without involving any expense; 
any half dozen working men may try the plan as it was 
tried in 1844 at Rochdale, by clubbing together sufficient 
to purchase a chest of tea from a wholesale grocer. If they 
find their first efforts are successful, they may gradually 
develope their plan, until at length it becomes a great and 
important trading establishment. 

. It has been in this chapter incidentally stated, that Distinction 
labourers have sometimes applied the cooperative prin- *^^^^^? ^'^- 

_ ^ ^ ^ ^ -L ^ operative 

ciple to various branches of industry, with the view of stores and 
appropriating to themselves the profits which are realised ^,31^ es- 
by capitalists. The establishment of a cooperative store taUish- 
is prompted by a different motive, because, in this case, the ^^"^*' 
chief object which the labourers have in view is to supply 
themselves with food of the best quality, on the cheapest 
possible terms. It is very necessary that this distinction 



286 Mawaal of Political Economy, 



BOOK 11. between a cooperative store and a cooperative trading 
s^^l_. establishment should be carefully observed. The reasons, 
however, which induce us to insist on this distinction will 
be better understood when we have given a detailed de- 
scription of a cooperative trading society. The particular 
establishment we intend to describe is a society of co- 
Paris operative masons which was founded in Paris in the year 
inoperative 1^^^- -^ small society of cooperative masons was estab- 
masons. lished in the year 1848 in Paris. This society was re- 
proached for holding certain political opinions, and the 
government attempted to discourage it by refusing to it 
any loan of capital. This intended hostility insured its 
future success ; for the societies which were assisted by the 
government, in almost every instance, proved to be failures. 
The cooperative masons endured many vicissitudes, and 
in the year 1852 they determined to reorganise their 
society. It then consisted of only seventeen members, and 
possessed no capital. They resolved to create a capital, 
by depositing in a common chest one tenth of their daily 
earnings. At the end of the first year a capital of 14^. 10^. 
was in this manner created. At the end of the year 1854 
the capital had increased to 680?.; and in 1860 the society 
consisted of 107 members, and the capital possessed by 
them was 14,500?. The following are some of the important 
buildings which have been constructed in Paris by this 
society — The Hotel Fould, in the Rue de Berry ; the Hdtel 
Rouher, in the Champs Elys^es; the Hotel Frescati, Rue 
de Richelieu; the Square d'Orleans, Rue Taitbout, &c. 
And at the present time these cooperative masons are 
building an hotel for M. Girardin, on the Boulevard of the 
King of Rome ; an hotel for M. Arsenne Haussage, on the 
Boulevard de I'Empereur; and an hotel at Montrouge, 
for M. Pacotte. No labourers except the shareholders are 
employed by this society. The labourers are paid the 
ordinary wages current in the trade, and the nett profits 
realised are apportioned in the following manner: — two 



On Cooperative Societies. 287 



fifths of these profits form a fund, from which the annual ^^^^ ^^' 

dividend on capital is paid; and the remaining three ' ^^-^ 

fifths are appropriated to provide an extra bonus on 
labour. The bonus which each labourer thus receives is 
proportioned to the amount of labour he has performed 
throughout the year. No arrangements that could be Tl^e^ secret 
devised would more powerfully promote the efficiency of Jf^^^g^J^ 
labour. This is the secret of the remarkable success 
achieved by this society. The cooperative masons have 
fairly entered into the great field of commercial compe- 
tition ; they have striven to do their work cheaper and 
better than others; and it is because they have proved 
that they can work better and cheaper that they have 
been employed to build residences for such persons as 
M. Girardin, and the others we have enumerated. 

The figures which have been just quoted prove the Advan- 
great pecuniary advantages which the labourers derive, if ^qS^J{^^^' 
they are enabled, by forming themselves into associations, trading es- 
successfully to carry on trading operations. Now it will ^^*g^*^^/" 
be instructive somewhat further to analyse the benefits 
which are thus conferred. In the first place, it may be 
observed, that the labourers receive the whole profits which 
result from their industry, because they themselves supply 
the capital which is required. Another most important 
effect seems likely to result from these associations, for 
they appear to hold out a fair prospect of correcting a 
very discouraging tendency, which is associated with the They tend 
present rapid accumulation of wealth. For we have previ- ^^^jj^e'^^g 
ously remarked, that each year the production of wealth growing 
is conducted on a greater « scale; manufactories are ^"^-^o/lwrTe^^ 
larged, farms are extended in area, and in every branch of capitalists 
industry there are those who seem, from the very vastness ^^ ^ ^ 
of their capital, to monopolise additional profit, and thus 
compel the smaller producers to succumb. Hence each 
year it becomes more difficult for the labourer to engage 
in any industry on his own account. Some centuries since, 



288 



They are, 
however, 
liable to 
many diffi- 
culties 
which do 
not affect 
cooperative 
stores. 



Manual of Political Economy. 

the agricultural labourers might hope, by ordinary pru- 
dence, to occupy one of the small farms into which the 
land was then divided; and quite within recent times, 
a great portion of the manufacturing industry of the country 
was carried on in the cottages of the hand-loom weavers. 
A hand-loom weaver might readily supply the capital which 
his industry required, for it was only necessary for him to 
purchase an inexpensive apparatus, and a small quantity 
of raw material. But agriculture, manufactures, and 
every other branch of industry now requires expensive 
machinery, and cannot successfully be conducted without 
large capital. Hence the industry of the country must be 
conducted by two distinct classes, namely, employers, who 
supply the capital, and workmen, who provide labour ; unless 
those who labour agree to form themselves into associa- 
tions, and subscribe amongst themselves sufficient capital 
to carry on production upon a large scale. It must be 
quite evident, that cooperative trading establishments, 
when successful, as it were intensify many of the advan- 
tages which labourers derive from cooperative stores. But 
we have separately described these two classes of institu- 
tions, because we think that the success of the former may 
be imperilled by many circumstances which do not affect 
the latter. In fact, we have already stated that, in the 
case of a cooperative store, success may be almost guaran- 
teed. For a certain number of customers are secured 
before business is commenced ; the expenses are extremely 
small, no credit need be given, and therefore the operations 
can be extended and contracted, and consequently no great 
loss need ever be incurred by a falling off in the demand. 
But the case is very different with regard to a cooperative 
society carrying on some branch of industry for profit. 
When this is done, every one engaged in the same trade 
or manufacture is competing for profit. Let us therefore 
enquire, whether a cooperative trading society enters into 
the competition with any particular advantages or disad- 
vantages. 



On Cooperative Societies, 289 

So far as the disadvantages are concerned, it may be bookh. 
remarked, that a cooperative society is in many respects . ^^; ^- . 
a joint-stock company. In fact, the only real distinction Bisadvan- 
between them is this ; in the former the labourers who are ^^5'es com- 
employed supply the capital, whereas in an ordinary joint- operative 
stock company the capital is subscribed by those who societies 

•,111 i J 1 , • , • , 1 ^'^^^ joint- 

neither labour not take any active part m the manage- stock com- 
ment of the concern. A cooperative society has therefore i^'*^"'^*- 
to contend with all those obstacles which so often prevent 
the success of a joint-stock company, when it has to compete 
with the individual trader or manufacturer. Has, there- 
fore, a cooperative society any special advantages to set 
off against these obstacles in the way of success ? In our 
opinion, some special advantages pertain to a cooperative 
trading society, because the capital required is supplied by 
the labourers; consequently each individual A^ho is em- 
ployed participates in the profits that are realised, and 
has therefore a direct interest in the work in which he is 
engaged. Hence all those feelings are called forth which 
stimulate the energy and activity of the employer; the 
workman is no longer listless and apathetic, but, as has 
been well said, cooperation secures the most efficient 
workmen, and calls forth their best efforts. To this cir- ^p^ *^^^^^ 

, •iiiii 111 I'll disadvan- 

cumstance is solely due the remarkable success which has tages were 
been obtained by the cooperative masons in Paris. They, ot'ercowe ly 

, .T , (. 1 • 1 . , the masons'* 

at the commencement, were favoured with no special society in 
advantages, custom was not given them from a feeling of ^'*^''*- 
charity, but they had to fight their way in fthe broad open 
field of competition; in fact, the difficulties the members 
of this Parisian society had to contend with were the same 
as those which must be struggled against if a few of our 
builders' operatives commenced a similar undertaking in 
London. If members of our nobility had their man- 
sions erected by a cooperative society, in preference to 
the great builders of the metropolis, it would be quite 
evident that the cooperative society was chosen because it. 



290 Manual of Political Economy. 

did its work in a more efficient and more economical style. 
The success, therefore, of the Paris society must be due to 
similar causes — namely, to efficiency and economy of work- 
manship; and these qualities have been secured because 
cooperation makes the labourer feel that he has a direct 
interest in the prosperity of the particular business in 
which he is employed. 

It would, however, be unfair to the labouring classes if 
we induced them to believe that all cooperative trading 
societies have achieved as much prosperity as the coopera- 
Progress of tive masons of Paris. For instance, a large cooperative 
milTat^ cotton mill was opened at Rochdale about three years since, 
Rochdale, and it has of course been affected by the same untoward 
causes which have cast universal gloom over the trade of 
Lancashire. There are one or two circumstances connected 
with this cooperative mill which may be dwelt upon with 
advantage. It is not surprising that the large profits 
which were realised at the Rochdale Pioneers' store should 
have suggested to some of its shareholders the advantage 
of extending the same principle to manufacturing in- 
dustry. Accordingly, in the year 1855, a room was rented, 
and filled with looms; large profits were at once obtained, 
even from this imperfect effort. The cotton trade was then 
at the height of its prosperity. Great encouragement, 
therefore, was offered to extend this scheme; a part of an 
old mill was rented, and it was filled with ninety-six 
looms; the capital in the concern at this time was 5,000^., 
the annual profits realised were thirteen and a half per 
cent., and the following rules of management were adopted. 
A dividend of five per cent, was paid upon capital, and 
this was considered the first charge upon profits ; one half 
of the remaining profits was paid as an extra dividend on 
capital, and the other half was distributed as a bonus 
amongst the labourers ; each labourer's share of the bonus 
being in proportion to the amount of wages he earned. 
The labourers, however, were paid the ordinary current 



On Cooperative Societies. 291 



wages, and therefore this bonus was an additional gratuity; book ii. 

hence such a society had the opportunity of engaging • '^ '.. > 

the most efficient workmen. The first success was so great, 
that numerous other workmen were anxious to subscribe 
their capital, and it was soon found that the capital sub- 
scribed was so great, that a larger mill was required than 
any which could be rented. It was therefore resolved to 
buikl one: it was commenced in 1856, and completed in 
1860, at a cost of 45,000Z. The newest and most approved 
machinery . was placed in it, and authorities agree that 
there is not a better mill in the v\^hole country. The erec- 
tion of this mill even did not exhaust the capital which 
the labourers were willing to subscribe; accordingly a 
second mill was soon commenced. The cooperative manu- 
factory happened to be opened at the very time when the 
dearth of raw cotton was commencing, and the under- 
taking has consequently hitherto been financially disastrous. 
The shareholders have shown great forbearance in con- Difficulties 
tendino^ ao^ainst these unavoidable misfortunes, but time t^ ^'{'^^cA tt 
can only prove whether this cooperative undertaking will subjected hy 
continue to survive the present crisis in the cotton trade*. 

* Our beKef that this cooperative institution will survive the crisis in 
the cotton trade has been much strengthened by the information contained 
in a letter just received from Mr. Ashworth, one of the very intelligent 
managers of the Pioneers' Society. He writes to us at the end of November 
1862, when the distress in the cotton districts was felt in its full intensity, and. » 
yet he assures us that the cooperative cotton mill is working three days 
a week, although many of the adjoining mills are completely closed. A co- 
operative cotton mill may thus continue working if its returns are sufficient 
to pay the wages of the labourers, because if these labourers are share- 
holders, they may regard the wages which they receive as a return, partly 
for their labour and partly for their capital, whereas the individual mill- 
owner will not continue to embark capital in his business if this capital 
meets with a very much less return than he could obtain for it in some 
other investment. 

Mr. Ashworth's letter also strikingly corroborates what we have stated 
with regard to the small risk of loss in a cooperative store, for the Pioneers' 
Society at Rochdale, although surrounded with distress, continues prosper- 
ous ; and Mr. Ashworth states that some new premises have been lately 
bought, and that their corn-mill is now being enlarged for the third time. 
I 'At the close of the year 1864, while the second edition of this work 
Us passing through the press, T am rejoiced to hear that this cooperative 

I u2 



292 Manual of Political Economy. 

BOOK n. The circumstances, liowever, which have proved adverse to 
. ^^ ' J^- . this cooperative manufactory, are entirely exceptional. If 
the ■present it should fail, no one ought for that reason to lose faith in 
crms. ^Q utility of the cooperative principle ; all that ought to 
be deduced from such a failure is, that the cooperative 
principle had been perhaps too hastily applied to a branch 
. of manufacturing industry which is probably more specu- 
lative than any other. For, in the cotton trade, periods of 
great activity have always been succeeded by times of 
corresponding depression. In fact, any cooperative trading 
establishment is a much more hazardous undertaking than 
a cooperative store; for the former is liable to be preju- 
dicially affected by dullness of trade, whereas a cooperative 
store is subject to no such fluctuations in prosperity; the 
main object it has in view is to supply the labourers with 
the first necessaries of life, and the demand for these does 
not vary greatly from year to year. 
Tkeprin- It ought to be stated that the cooperative masons in 
cipleof Paris never employed any labourers but those who were 

dividing a -, t -, in fi • ^ • i- 

sAareo/iAe shareholders; the advantage 01 adoptmg this rule is very 
profits apparent, and, unfortunately, English societies have not 
labourers adopted a similar regulation. Thus, in the cooperative 
has been ootton manufactory at E-ochdale, many of the labourers 

disregard- "^ "^ 

ed at Roch- who were employed were not shareholders, and hence a 
dale. hostility of interests was at once created which it is the 

main purpose of cooperation to prevent, for the share- 
holders of the society who were not also labourers soon said, 
Why should we give up a portion of the profits to those 
who only labour, and who have supplied no capital? We 
have no difficulty in obtaining operatives even without this 
gi-atuity, and we are therefore making a free gift, which 
we might appropriate to ourselves. Many, however, of 
the more thoughtful shareholders said, Our cooperative 
society is based upon the fundamental principle that 

cotton mill is still kept working three days a week, although the crisis iu 
the cotton trade has continued with almost undiminished intensity. 




On Cooperative Societies. 293 

labourers should share the profits. If they do not do so, 
our society is at once converted into an ordinary joint- 
stock company, and we are deprived of all our special 
advantages for obtaining success. This advice was at first 
attended to, but ultimately the opposite party prevailed, 
and it has been lately decided that the labourers shall no 
longer be entitled to any share of the profits. Those, there- 
fore, who establish a cooperative trading society ought most 
rigidly to observe the rule, that none but those who sub- 
scribe capital should be employed as labourers. Such 
a regulation will provide the best guarantee against the 
unfortunate error which has been committed at Rochdale. 

After the most careful consideration of the whole sub- Prospects 
ject, we come to the conclusion, that cooperative stores, folplratife 
whether on a large or small scale, are almost sure to stores. 
prosper. We therefore trust that the rapid extension of 
these establishments^ which is at the present time taking 
place throughout the country, may continue. With regard 
to cooperative trading societies, although we think the 
benefits to be derived from them cannot be exaggerated, 
yet their success is not so certain, and we therefore trust 
that they will be commenced with great caution, and that 
the labourers who undertake them will thoroughly ap- 
preciate beforehand the difficulties with which they will 
have to contend. The trade to which the cooperative 
principle is applied ought not to be of a speculative nature, 
and we therefore think that it was perhaps a somewhat 
hazardous experiment to found a cooperative cotton mill. 
It is quite possible that a farm, for instance, might with 
great advantage be cultivated by associations of labourers*. 

* While this work was passing through the press, I heard for the first 
time that a considerable area of land belonging to Mr, Gurdon, of Assington 
Hall, Suffolk, has been during many years most successfully cultivated upon 
the cooperative principle. Mr. Gurdon informs me that he has long been 
much impressed with the miserable condition of the agricultural labourers 
upon his own and neighbouring estates. He therefore determined, about 
thirty years since, to establish some cooperative farms. He accordingly 
let his land to the labourers who were employed upon it, charging them the 



294 Manual of Political Economy. 

Tlie quantity of corn and meat that is purchased by the 
Rochdale Pioneers would require a large farm to produce 
it, and there is no reason whatever why growing their 
own wheat should not be" as possible as grinding their own 
flour has proved to be. In conclusion, we will only further 
state that the cooperative principle can be most advan- 
tageously applied to those branches of industry whose 
success is mainly determined by the skill, care, and energy 
of the individual workman, for it cannot be denied but 
that cooperation must call forth all those qualities upon 
which the efficiency of the workman depends*. 

ordinary rent whicli would be paid by a tenant farmer. He advanced them 
sufficient capital to cultivate the land, and this capital was to be repaid in 
a certain number of years. Mr. Grurdon has now been repaid all the capital 
which he originally advanced, and these cooperative farms are in the highest 
state of cultivation. The labourers, as at Rochdale, select from amongst 
their own body a committee of management, and those who are employed 
receive the ordinary agricultural wages. The profits are divided according 
to a plan very similar to that which has been adopted at Rochdale. It is 
hardly necessary to remark, that the labourers who are emjDloyed on these 
cooperative farms possess social and material advantages which never fall 
to the lot of ordinary agricultural labourers. 

Mr. Gurdon deserves the homage which is due to one who benefits his 
fellow-men, for he has practically shown, by his successful experiment, how 
the condition of those labourers may be improved who are the poorest, and 
therefore the most wretched. 

* During the time which has elapsed between the publication of the first 
and second editions of this work I have heard with great pleasure that 
a cooperative store has been established in New York, and has already 
achieved considerable success. The Messrs. Sinclair, who are leading mer- 
chants at Belfast, in Ireland, have a branch establishment in New York. 
Mr. J. M. Sinclair is the representative of the firm in that city, and to him 
is due the credit of being the originator of the first cooperative institution 
which has been established in America- Mr. Sinclair had long been anxious 
to provide the men in his employment with an eligible investment for their 
savings, and he had also recognised the diSiculty which they experienced in 
purchasing imadulterated food at reasonable prices. Mr. Sinclair, when he 
had read the account of the Rochdale Pioneers' Society, at once perceived 
that a similar institution would secure to his workmen the advantages which 
he was most anxious they should enjoy. He accordingly assembled his 
men, recounted to them what had been achieved at Rochdale, and advised 
them inmiediately to commence a similar undertaking. A cooperative store 
was at once established, and its success has been so great, as to justify the 
expectation that in America the cooperative principle is likely to spread as 
rapidly as it has in England. 



295 



CHAPTER XL 

ON" THE ECONOMIC ASPECTS OF SLAVERY. 

IT has been already remarked, that when land is culti- book n. 
vated by a peasant proprietor, the entire produce , ^h- ^ ^i- , 
belongs to him, because he provides the land, labour, and /^^^ 
capital ; but this ownership of land, labour, and capital, duct of 
by the same individual, is also characteristic of slave laHonis *" 
cultivation, for if a farmer owns slaves, they are as much divided 
a part of his capital as the horses which plough his ground, two^lasses. 
When land is cultivated entirely by slaves, no portion of the 
produce is allotted to the labourers in the form of wages ; 
slaves are not permitted to possess property, and they are 
therefore never paid wages ; they of course have to be fed, 
and so have the horses which till the ground. Slaves 
therefore should not be regarded as labourers receiving 
wages, since they are as much a portion of the cultivator's 
capital as any kind of stock or implements which he may 
possess. Consequently, in slave cultivation, the produce 
of the land has not to be distributed between rent, profits, 
and wages; but simply between rent and profits. 

Even if slavery were not so universally condemned as it importanre 
is, a discussion on the moral effects of slavery would not ¥ '^^^^^der- 

111 i-'i n 1 ' ' 1 *'^5' ^"'^ ^^'^' 

properly belong to political economy; lor this science only nomical 
undertakes to investigate the phenomena which concern ^-f^^^^ ^^ 
wealth. No unimportant service, however, will be rendered 
to every philanthropist, and to every lover of freedom, if 
the principles of political economy demonstrate that slave 
labour is inefficient and un-economical, and that it ulti- 



296 Manual of Political Economy. 

mately diminishes the productiveness of the soil. If these 
facts can be established, slavery must ultimately work out 
its own destruction, provided that the area over which it is 
permitted to extend can be restricted. The complete eman- 
cipation of the African negro really, therefore, depends 
upon economic considerations, for if large profits are per- 
manently realised by slave labour, the day is indefinitely 
remote when the present slave-holding States will become 
sufficiently moral to resign a productive source of wealth, 
simply because it involves a cruel injustice. 
Defects of The economic aspects of slavery have never perhaps 
slave before been discussed in so clear and masterly a manner 

labour. , . mi on 

as m a recent work by Professor Cairnes, on ' The Slave 
Power.' This writer has most aptly said, that the labour 
of the slave has the three following defects : — ' it is given 
reluctantly; it is unskilful; it is wanting in versatility.' 
We will, therefore, in the first place, explain the causes 
which produce, and the consequences which result from, 
It is given each of these defects. No one can doubt but that slave 
reluctantly, j^bour must be given reluctantly. The only object which 
the slave can have is, to do no more work than is sufficient 
to prevent corporal or some other kind of punishment 
being inflicted upon him; the slave has no more interest 
in the prosperity of the industry in which he is employed 
than the mere beast of burden, for whether the crops are 
good or bad, the slave is sure to be fed. An able-bodied 
slave can be sold in America for 250^., and therefore the 
self-interest of the slave owners will always provide a 
guarantee that the physical comforts of a slave will not be 
so much neglected as to endanger his health. No farmer, 
if he were in his proper senses, would ever permit a valu- 
able horse to suffer, either from ill treatment or from 
want of food, for if he could not afford to keep the horse 
properly, it would of course be better for him at once to 
sell it. A slave therefore has no motive to exert himself, 
for whether he is industrious or not, he is sure to obtain 



On the Economic Aspects of Slavery. 297 

'the food and clothing which his master thinks he may book ir. 
require. Consequently, his labour is as it were extorted . ^"•^ '^l'__^ 
from him, and he requires to be most vigilantly watched. 
Slaves can therefore only be advantageously employed 
when the work upon which they are engaged is such that The slaves 
they can be collected together in gangs, for it is impossible '^g^ent/yhe 
to watch a great number of workmen when they are worJced in 
scattered about. This consideration suggests the reason ^^^■^^' 
why the only commodities which have been produced on 
any large scale by slave labour are cotton, tobacco, sugar, 
and rice ; for the cultivation which each of these com- 
modities requires is characterised by the circumstance 
that a great amount of labour is employed on a very small 
area, and the labour can therefore be concentrated. Mr. 
Olmsted, whose most valuable work on 'Slavery' contains 
an exhaustive record of facts, has calculated that one 
labourer will cultivate ten acres of wheat, whereas one 
acre sown with cotton requires the labour of at least ten 
men. A similar remark holds true with regard to the 
other products, namely, tobacco, sugar, and rice, which are 
cultivated by slave labour. This necessity of working This deter- 
slaves in gangs, in order that they may be vigilantly ^l^clucts 
watched, is strikingly exemplified by the present geo- w^o« which 

1 • 1 T , -T ,• n -I • k • r xi • slavelahour 

graphical distribution 01 slavery m America; lor there '^^ is emplov- 
nothing in the original constitution of the states which ed, and its 
composed the Federal Union that will satisfactorily account ^^^^J^^f,^!" 
for the fact, that the North is cultivated by free labour, ^ution. 
whereas the South is cultivated almost entirely by slave 
labour. It is sometimes hastily concluded, that Europeans 
cannot work in the South, but this is an entire mistake; 
many of the Southern States, such as Virginia, have a 
climate quite as well adapted to Europeans as many of the 
free States of the West, such as Wisconsin. The bounda- 
ries of slavery are not determined by climate, but by the 
nature of the products which the soil is best fitted to grow. 
If corn were grown by slave labour, this labour would be 



298 Manual of Political Economy. 

inefficient, because it could not be sufficiently concentrated 
to be adequately watched; hence slave labour becomes 
more expensive than free labour, and therefore cannot 
compete against it, when such a commodity as corn is 
grown. This conclusion can be corroborated in a very 
remarkable manner, for some parts of the Southern States, 
such as the slopes of the Alleghanies, are well adapted to 
grow corn, and the other commodities which form tbe 
staple products of the North. It is a most instructive fact, 
that these particular localities, although in slave states, 
and surrounded with slavery, are invariably cultivated by 
free labour. It is therefore proved that slave labour, be- 
cause it is reluctantly given, must be most carefully watch- 
ed ; and unless this can be done, the labour of the slave 
becomes so inefficient that it is far more expensive than 
hired labour, even in those countries, such as America, 
where high wages prevail. 
Slave la- Unskilfulness is the second defect which belongs to slave 
^haful ^'^' l^^o^^j ^^*^ i^ ^^^^ ^^^^ defect is an inevitable consequence 
of the first defect, because, when labour is reluctantly given, 
it is sure to be deficient in skill. If the slave has no motive 
to put forth his physical energies, he certainly has no 
greater inducement to apply his mental faculties in order 
to acquire skill and dexterity; since his position would in 
no way be improved, even if he were to show that he was 
a more valuable workman than his fellows. He must be 
fed, and so must they; and the fact that his price would 
be advanced in the slave market by an increase of skill, is 
a matter of no consequence whatever to himself The 
more a slave shows that he is capable of doing, the greater 
is the amount of work which will be extorted from him, 
and for this extra exertion he receives no additional reward 
whatever. It is therefore for the interest of the slave to 
disguise as far as possible, from his master, the amount and 
the kind of work which he can really perform ; a heavy 
discouragement is consequently thrown in the way of the 



On the Economic Aspects of Slavery. 299 

least mental effort, and slave labour must always be most book ii. 
unskilful. These conclusions can be corroborated by ■ ^"•^^^- . 
specific facts, for it has never even been proposed to em- Facts which 
ploy slave labour either in manufacturinof, or any other ^^^J^^^, ^^'>'^ 
industry which requires skill on the part of the labourer. 
We will once more refer to Mr. Olmsted, for from per- 
sonal observation he gives direct testimony with regard 
to the unskilfulness of slave labour; thus he says that the 
negro slave is entirely unfit to be trusted with machinery ; 
if he has placed in his hands any but the rudest tools, 
he is sure to break them. Mr. Olmsted affirms that the 
slave owners of Yirginia find it more economic to use 
implements so heavy and clumsy that it increases the cost 
of performing work at least ten per cent., simply because 
they are not so liable to be injured or broken ; and also 
mentions the very curious fact, that mules are almost in- 
variably employed in the Southern States, instead of horses, 
because slaves are sure to neglect or ill use any animals 
which they have in charge ; the mule being a hardier 
animal than the horse, is consequently not so liable to be 
injured by the want of proper treatment. These facts, 
and others which might be enumerated, clearly prove that 
no skilled industry can ever be successfully carried on by 
slave labour. 

The third defect of slave labour, namely, want of versa- slave la- 
tility, is due to the same causes as those which produce the ^^^^^^^ • 
other two defects which we have already discussed; for versatility. 
labour which is given reluctantly, and is unskilful, cannot 
possibly display any versatility. A labourer must possess 
considerable intelligence if he is able efficiently to perform 
several different kinds of work. Such intelligence, how- 
ever, is sure never to be displayed by the slave ; for if he 
only shows that he is able to do some additional kind of 
work, extra labour will probably be forced upon him, 
and therefore he rather loses than gains by acquiring 
versatility. Hence it is quite natural that slaves should 



300 Manual of Political Economy, 

show a great disinclination to be taught any new kind of 

work ; upon this point Professor Cairnes has said, ' The 

difficulty of teaching the slave any thing is so great, that 

the only chance of turning his labour to profit is, when he 

has once learned a lesson, to keep him to that lesson for 

life. Where slaves, therefore, are employed there can be 

no variety of production. If tobacco be cultivated, tobacco 

becomes the sole staple, and tobacco is produced whatever 

be the state of the market, and whatever the condition of 

the soil.' 

TheexpU' Before we proceed to describe some important conse- 

^heseZecit- q'^eiices whicli result from the defects in slave labour 

Rarities of which have been just enumerated, it will be advisable to 

slave labour , • • , ii-i iiii i 

by the race anticipate a remark wnicn may very probably be made. 
of the slaves ^ome of our readers may say, although it is true that the 
11^^ negro slave labour possesses all the defects which are here 

ascribed to it, yet these defects are inherent in the negro 
race, and do not necessarily form a part of the institution 
of slavery. The history of ancient countries no doubt 
gives some support to this opinion, for it may be urged, 
that when Greece was in her greatest glory, a considerable 
portion of her skilled industry was performed by slaves, 
and that they constructed buildings and other works which 
never have been surpassed in artistic beauty. But the social 
position of the Athenian slave in no respect resembles 
the position occupied by the slaves in the United States. 
Even many Americans who do not live in the slave states 
despise the negro as a being degraded by inferiority of 
race, and consider that his colour makes him a permanent 
outcast. But the Greek slave was generally a captive 
obtained in war; perhaps he was respected for the courage 
he had shown on the battle-field, even in defeat; he very 
possibly belonged to a race whom the Greeks scarcely 
regarded as their inferiors. The Greek slave had certain 
rights of property secured to him, and he always had a 
definite hope that he should be able, by his own exertions. 



On the Economic Aspects of Slavery. 301 

honourably to emancipate himself. His industrial energy book ir, 
therefore, instead of being completely destroyed, was . ^h. xi. ^ 
powerfully stimulated, and unlike the negro slave, whose 
interest it is to be unskilful, he had every motive to exert 
himself to the utmost. There is therefore no parallel 
whatever between the condition of the Greek and that of 
the negro slave. Our previous conclusions are conse- 
quently not in the least degree shaken ; for if slaves are as 
completely deprived of every human right as they are at 
the present time in America, we may be quite sure that 
their labour must exhibit all the defects which we have 
attributed to it, whatever may be the race to which the 
slave may happen to belong. From these defects in slave 
labour some very important consequences result, which 
we will now proceed to describe. 

It has already been stated, that the slave is wanting in Slave la- 
so many of those qualities which make labour efficient, that ^a^^ucau? 
there are very few branches of industry which can be to a few 
successfully carried on by slave labour. For instance, J^^g^ *" 
corn, and the various other products of European agricul- 
ture, are never grown by slave labour. Slaves are never 
employed in the manufacturing industry, because they 
cannot be entrusted with machinery ; in fact, slave labour 
may be said only to produce four commodities, viz., cotton, 
sugar, tobacco, and rice. If any other kind of industry is 
attempted, slave labour is sure to be supplanted by free 
labour, because the superior efficiency of the latter makes 
it more economical. But although the four products just 
enumerated can be profitably cultivated by slave labour, 
the profit even in this case cannot be obtained unless 
certain conditions can be fulfilled. It is, in the first place, 
evident that the unskilfulness and general inefficiency of 
slave labour causes it to be extremely wasteful and care- 
less. The cultivation of the land with such labour must 
inevitably be slovenly, and consequently the land is gradu- 
ally impoverished. Moreover, there is another circumstance* 



302 Manual of Political Economy. 

BOOK II. wliicli tends to impoverish the land when it is cultivated by 

V ^^-^^J- , slaves; for, at the present time, able-bodied slaves are 

It therefore worth no less than 250^. in the American markets. Hence 

tends to ^ planter must require a capital of 25,000^. in order to 
exhaicst the ^ -t /^/^ i mi 

soil. purchase 100 slaves. ihe greater part oi the planters 

capital will probably be absorbed in obtaining slaves, and 
he will therefore have little to spare for carrying out im- 
provements in his land. Hence slave cultivation gradually 
exhausts the soil, and it therefore becomes all-important 
to the slave owners that they should be able to obtain 
fresh soils of virgin fertility. The highest authorities, 
many of them slave owners themselves, agree with perfect 
unanimity as to the exhaustive nature of slave cultivation. 

Evidence of ^Q will Quote the verv remarkable testimony of the 
ay. jj^^^^ Q_ Clay, who is moreover a native of the South, and 
an advocate of slavery. He says, 'I can show you with 
sorrow, in the older portions of Alabama, and in my native 
county of Madison, the sad memorials of the artless and 
exhausting culture of cotton.' He then states that the 
majority of the planters had not sufficient means to im- 
prove their land, either by rest or by the application of 
manures, and that they consequently move farther West, 
or South, in search of virgin soils, which will be impover- 
ished in their turn ; and he then proceeds emphatically to 
affirm, that 'a country in its infancy, where fifty years ago 
scarce a forest tree had been felled by the axe of the 
pioneer, is already exhibiting the painful signs of senility 
and deca}^ apparent in Virginia and the Carolinas; the 
freshness of its agricultural glory is gone, the vigour of its 
growth is extinct, and the spirit of desolation seems 
brooding over it.' These most suggestive remarks of Mr. 
Clay might be easily corroborated by a great mass of 
similar evidence, and it may therefore be regarded as 
conclusively proved, that slave cultivation cannot continue 
to be profitable unless the slave holders have at their 
command an abundant supply of fertile virgin soils. This 



On the Economic Aspects of Slavery. 303 

suggests an explanation of the policy which has been long book ii. 
pursued by the Southern States of America; for they • — ^ ' > 
have ceaselessly directed their efforts to bring new and Explana- 
unoccupied territories under the dominion of slave insti- ^'^!! ^^ ^i^ 
tutions. Texas was unjustly seized from Mexico, and yet the South. 
its soil was not immediately wanted, for since its annexa- 
tion comparatively few slaves have been located there. 
The South, however, fully recognised the future importance 
of acquiring this vast area of fertile and unoccupied land. 
Similar motives induced the South to strain every effort to 
obtain possession of Kansas. It is doubtless an error to 
suppose that the present Civil war in America will decide 
the immediate abolition of slavery; no practical scheme 
for attaining this object has been as yet proposed, but the 
great question which is at stake is this — Shall the limits 
of slavery be indefinitely extended? The friends of abo- 
lition may be well satisfied if slavery can be confined 
within its present limits, for the defects which inherently 
attach to slave labour are such that slavery must cease to 
be profitable, and therefore will ultimately be extinguished, 
if it is permitted to work only upon a restricted area of 
land. 



BOOK III. 
EXCHANGE. 



X 



CHAPTER I. 

ON VALUE AND PKICE. 



THE subject of exchange is so intimately connected with book m. 
every question of political economy, that many writers > — 2^' ^' . 
on this science consider that the production and distribu- Bea^omfor 
tion of wealth cannot be understood without previously ^?^ ^r* 

-•■ -^ viously con- 

ascertaining the laws of exchange. There is reason for sidering 
this opinion, because it is quite true that commodities are *'*^"^' 
only produced to be exchanged for other commodities, and 
the distribution of wealth of course implies the exchange 
of wealth. We believe, however, that clearness of concep- 
tion is obtained by the arrangement which we have adopted 
in this work, for we have been able to discuss the laws of 
the production and distribution of wealth, without antici- 
pating any of the laws of exchange, which we shall now 
proceed to explain. 

We have already occasionally employed the words Distinction 
value and price, without giving these terms any precise ^^i^^ ^^^^ 
definition. But before investigating the laws of exchange, J'^'^'cc 
it is most important to define these words accurately; for 
many of the most wide-spread errors with regard to eco- 
nomic science arise from confusing the words value and 
price. The difference in their meaning will be best 
marked by an illustration. If a sack of wheat exchanges 
for a ton of coal, or if, in other words, a person who 
possesses a sack of wheat can obtain a ton of coals in 
exchange for it, then a ton of coals is the value of a sack 
of wheat, or, employing more popular phraseology, a sack 

X2 



3o8 Manual of Political Economy. 



BOOK iir. of wheat is worth a ton of coal. It therefore appears that 
^ — ^ ■' / value implies the comparison of one commodity with 
another ; for a sack of wheat has some particular value 
with regard to every commodity for which it can be ex- 
changed. If a sack of wheat could be exchanged for six 
pounds of tea, then six pounds of tea would be the value 
of a sack of wheat, when estimated in this particular 
manner. "Value, therefore, is a relative expression; for 
instance, if the value of wheat compared with any par- 
ticular article falls to a certain amount, there must be a 
corresponding rise in the value of this commodity, com- 
pared with wheat ; for if wheat declines in value, so that 
it will only exchange for half as much tea, then tea must 
manifestly rise in value, since it will now exchange for 
twice as much wheat. When, therefore, the general value 
of a commodity declines, less of every commodity can be 
obtained for it in exchange ; but if this be so, the value of 
all these commodities must rise when compared with the 
particular commodity in the value of which it has been 
A general supposed a general decline has taken place. These con- 
0/ mLe'z's siderations demonstrate the erroneous nature of a statement 
impossible, not unfrequently made, that there is a general rise or fall 
in the value of all commodities. This is as impossible as 
it would be for each one of six rowers to rov^ faster or 
slower than the other five. A. cannot row faster than his 
five companions, except by each of these rowing slower 
than A. In a similar manner value is a relative expression, 
and essentially implies comparison. It is quite impossible 
that there should be a general rise of values, for if there is 
a rise in the value of one commodity, there must be a fall 
in the value of all the commodities with which this one is 
compared. All that is here stated may appear so simple, 
that it may perhaps be supposed we are wasting time in 
explaining self-evident truths. But if these truths are self- 
evident now, they are far from, being so when observed in 
the entanglement of a more complicated proposition, for 



On Value and Price, 309 

we shall be enabled to show that a shade of error has been 
cast uver the speculations of some of the most accom- 
plished writers on political economy, because they have 
neglected the simple considerations which we have men- 
tioned with regard to the meaning of the word value. 

Price is a particular case of value. If the value of a p^ice is 
commoditv is estimated by comparing it with those pre- value esti- 

'' . ..,., . mated tn 

clous metals which civilised countries employ as money, ^^^ metaU 
then it is said that the price, and not the value of a com- ^*'^^^ *« 

. . , J money. 

modity, is ascertained. If a sack of wheat is exchanged 
for a quantity of gold, termed a pound sterling, it would 
be perfectly correct to say that the value of a sack of 
wheat, estimated in gold, is one pound sterling; but for 
reasons which will be afterwards explained, it is found 
convenient to single out this case of value from every 
other, and consequently it receives a particular name^ for 
it is not termed value, but price. The price of a com- 
modity may therefore be defined as its value, when esti- 
mated by comparison with those precious metals which 
civilised countries have by general consent adopted as 
money. We have already explained that there cannot be 
a general rise or fall in values; there can, however, be a 
general rise or fall in prices. If the precious metals be- 
come much more plentiful, their value compared with 
all other commodities declines, for a certain quantity of 
gold or silver will exchange for a diminished quantity of 
all other commodities. But if the value of the precious 
metals, compared with other commodities, is diminished, 
then the value of all other commodities, compared with 
the precious metals, must be increased; but, according to 
our definition, the value implied in this latter comparison 
is termed price, and consequently the price of all commodi- 
ties will be increased. It is therefore evident that there 
may be a general rise in prices, although there cannot be 
a general rise in values. 

In political economy we may, of course, elaborate a, Reasons/or 



3IO 



Manual of Political Economy. 



ccffisidcring 
price in- 
stead of 
value in 
this trea- 
tise. 



Ordinary 
method of 
political 
economists. 



system of propositions which treat of the value of com- 
modities, and not of their prices. This is usually done, 
but it only adds to the difficulty of the subject, without 
attaining any practical object of utility; for none of the 
transactions of trade and commerce in civilised countries 
are ever arranged without the machinery of a monetary 
standard. Money has aptly been described as the uni- 
versal medium of exchange. If it is desired to ascertain 
how much of one commodity another will exchange for, 
the calculation is always made in money ; the prices of the 
commodities, and not their values, are considered. If, for 
instance, a person w^ho possessed wheat desired to pur- 
chase coal, it would be important for him to estimate the 
value of wheat compared with coal; but he would not 
attempt to do this by actually bartering away his wheat 
for coal; such bartering would be cumbrous and expensive. 
All that it would be necessary for him to do would be to 
ascertain how much money his sack of wheat would ex- 
change for. When he thus knew the price of a sack of 
wheat, and also the price of a ton of coal, the value of 
wheat estimated in coal would be immediately known, 
because the quantity of coal for which a certain quantity 
of wheat would exchange would be accurately ascertained. 
As therefore, in practice, questions of value involve a 
comparison of prices, we think our investigations will 
be simplified if we at once proceed to consider the laws 
which regulate the price of commodities, and make no 
attempt, as is usually done, to establish propositions with 
regard to the values of commodities, independently of any 
considerations concerning price. The ordinary method 
pursued in political economy is to establish a theory of 
value before any exposition is given of the functions of 
money. The subject of exchange is usually introduced 
with such chapters as the following: — Of Value; — De- 
mand and Supply in Relation to Value; — Of Cost of 
Production in Relation to Value. In these chapters we 



On Value and Price, 311 

shall ' ubstitute price for value, because we shall thus be book hi. 
able to make our illustrations appear much more real, and . ^^ i ^' . 
therefore better understood. But until we discuss the 
functions of money, it will be necessary for our readers 
carefully to bear in mind that a certain assumption 
is made in all the in'vestigations which involve the con- 
sideration of price. The assumption is this; that when 
the price of a commodity varies, the variation is always 
supposed to be produced by something which affects the 
value of the commodity, and not the value of the precious We shall 
metals. We will endeavour to explain our meaning: still "^*^^^ "^ ^ 

CH ' ' ^ ^present that 

further, by an illustration. Suppose it is observed that the value of 
the price of wheat rises ; this rise in the price of wheat *^*^J^<^,^^** 
may be due to two very distinct causes. In the one case, not affected 
wheat may become scarcer, and therefore dearer; in the ^|^^^ i^ 
other case, wheat in common with every other commodity the mines. 
may rise in price, in consequence of new discoveries of the 
precious metals, such as those made in Australia and 
California, during the last few years. We wish, therefore, 
in the following chapters, which precede the discussion of 
the theory of money, to make the assumption that all 
variations in price are not in any way caused by an altera- 
tion in the value of the precious metals. Our readers must, 
therefore, bear in mind that in the next two or three 
chapters the value of the precious metals is supposed to 
remain stationary. This assumption will enable us to 
explain with much greater facility many most important 
propositions connected with the theory of exchange; we 
shall then investigate the theory of money, and in this 
manner complete the theory of exchange. 



312 



CHAPTER IL 

O:^ THE CAUSES WHICH REGULATE THE PRICE OF 
COMMODITIES. 

THE commodities which compose the wealth of a nation 
may be divided into three classes; and the manner in 
Three which the price of any particular commodity is regulated 
tommo% ^^P^^ds upon the class or division to which the commodity 
ties, may happen to belong. The three classes may be charac- 

terised as follows : — 
ThosewMch 1st. Some commodities are absolutely limited in quantity ; 
luteiy '^' however great the demand may be for them, it is impos- 
Umited in siblo to increase their supply. Only a certain number of 
quanht]/. sculptures and paintings by ancient masters are extant, 
and no efforts can increase the number of these paintings 
or sculptures. Again, if some particular site may be 
thought desirable for a house, the number of houses which 
can be built upon this site cannot exceed a certain limit. 
Thus, the shops in a thoroughfare such as the Strand, or 
Fleet Street, cannot exceed a certain number; articles of 
vertu, curiosities and antiquities, which are prized because 
some particular associations are attached to them, are in a 
certain degree fixed in quantity. There may thus be 
perhaps half a dozen very rare coins in the cabinets of 
collectors, and no one can feel certain that another of these 
coins will ever be discovered. 
Those of 2nd. Some commodities can be increased in quantity, 
m^X^y ^^*^^^^ ^^y practical limit, but if their supply is in- 
leincreased creased their production will require a gi'eater proportional 
y greater expenditure of labour and capital, and therefore tliese 



Tlie Causes ivhich regulate the Price of Commodities. 313 

commodities have a constant tendency to become more book m. 

expensive, as the demand for them augments. We have ^ ^^-1-^ 

already remarked that this character peculiarly belongs to ^ropor- 
agricultural produce. If there is an increase in the de- f T^^^ 
mand for agricultural produce, it becomes necessary 
to resort to less fertile land, which cannot be cultivated 
without a greater expenditure of labour and capital in 
proportion to the produce which is raised from it. Many 
of the most important speculations of economic science 
depend upon the tendency which agricultural produce 
has to become more expensive, as the demand for it in- 
creases. As an example, we may recall to our reader's 
recollection that Eicardo's theory of rent can be readily 
deduced from this law. 

3rd. Some commodities can be increased without any Those which 
practical limit, or without increasing their cost. Manu- ^^LiiJy 
factured goods may be placed in this class, for although increased at 
the cost of the raw material will, like the cost of agricul- ^^^^^ 
tural produce, increase as the demand for it is augmented, lalour. 
3^et the increase of cost which is thus produced may be 
almost neglected, beca.use it bears such a small proportion 
to the whole cost of the manufactured article. Other 
articles, such as household furniture and wearing apparel, 
may be placed in this third class. There is no reason why 
shoes, for instance, should become scarcer because there is 
a greater demand for them ; there could be no difficulty 
in supplying any number of shoes for which there may be 
a demand. 

We shall now explain that very different laws will regu- Lawt, ichlch 
late the price, and therefore the value of a commodity, '^^^l^e^^ ^^^ 
according to the particular class of the three above enu- thesi classes. 
merated to which the commodity may happen to belong. 
We will commence by considering the commodities in- 
cluded in the first class. 

The works of a departed artist have already been stated Example of 
to be included in this class. Let us enquire what determines ckm.^ 



314 Manual of Political Economy. 

500KIII. the price of one of Turner's pictures. The price is 

' '^-L^ usually supposed to be regulated by demand and supply; 

The price but the words 'demand and supply' appear to be a never 

of a picture ^2i\\.uig recipe for solving every economic difficulty, and 

ceased popular writers and popular speakers seem to think that 

artist. g^j^ explanation based upon demand and supply must be 

not only very satisfactory, but also extremely scientific. 

• The expression * demand and supply' too often conveys as 

little meaning to those who use it as to those to whom it 

is addressed. If the question were asked, what regulates 

the price of Turner's pictures, it is not improbable that 

even many writers on political economy would say, that 

the price is regulated by the ratio which exists between 

the supply of these pictures and the demand which exists 

The state- for them. But it surely must be erroneous to speak of a 

mentthatit^^^:^^ between demand and supply; there cannot be such 

ts deter- • n i-i- l i. ^ ^ ^ ^ 

mined ly a ratio, for supply m this case means a certain number 01 pic- 
^ u ^iv^and ^^^^^^ ^^^ demand in this case signifies a desire to possess a 
demand is picture. It is therefore absurd to attempt to establish 
inaccurate. ^ j;g^^[Q between a picture and a desire to possess it. A 
ratio can only exist when the two things compared are of 
the same kind. It is, therefore, in this case impossible to 
suppose a ratio between supply and demand. Demand is 
an indefinite expression; every educated person would like 
to possess a picture by Turner, and therefore in this sense 
the demand for them is almost universal; but the uni- 
versality of such a demand cannot surely produce much 
effect in determining the price of a picture ; a beggar 
would like to have a diamond, but a jeweller does not 
obtain a higher price for a diamond, because every beggar 
may be extremely desirous to possess a diamond. This 
obvious ambiguity with regard to the meaning of the word 
demand has suggested to political economists the use of 
Meaning of the term 'effectual demand.' It is intended to denote by 
the term ^]^^g expression the demand which is exerted by those who 
demand.' are not merely desirous to possess some particular com- 



The Causes ivJiich regulate the Price of Commodities. 315 



modity, but who also have the requisite means to purchase book m. 
it. It is justly maintained that this demand is the only ^ — ;^_l_^ 
one which can be effectual in producing any influence Nature of 
on prices. Although the employment of the words 'effec- ^^l^^f{^'^' 
tual demand' recognises a real difficulty, yet the difB-Cultj tween 
itself continues to remain unsolved, for it cannot be said ^^^^/*^ 
that the price of an article is regulated by the effectual which ac- 
demand for it, since a moment's consideration will clearly „^^^/ ^ ^ 
show that the effectual demand for an article varies with 
and depends upon its price. If Turner's pictures could be 
purchased at ten guineas each, there would evidently be 
a much greater demand for them than if the same pictures 
realised a hundred guineas each. The effectual demand, 
therefore, varies with the price ; and adjustment takes 
place, and the price must ultimately be such that the 
effectual demand which results from it will be satisfied by 
the supply of the article or commodity in question. If 
one of Turner's pictures were to be sold, and three indi- 
viduals, namely A, B, C, were each willing to give 1,000 
guineas for it, the effectual demand for this picture, when 
its price is 1,000 guineas, would be manifestly greater than 
the supply, for at this price three persons have a demand 
for one article, which can only be purchased by one. 
If A and B are both willing to give 1,500 guineas for 
this picture, but C will not give so much, the effectual 
demand for this picture, when its price is 1,500 guineas, 
still exceeds the supply. Again, suppose that A is will- 
ing to give 2,000 guineas for the picture, but that B will 
not give more than 1,900; the price at which the effectual 
demand will equal the supply may then be any amount 
between 1,900 and 2,000 guineas. The price, however, 
which this picture might actually realise depends upon 
what has been aptly termed by Adam Smith the hig- 
gling of the market. Since B is willing to give 1,900 HujgUngof 
guineas for the picture, but no mote ; and since A will 
not purchase it at a higher price than 2,000 guineas. 



31^ Manual of Political Economy. 

BOOK III. the picture must consequently sell at some price between 
' — ^— ^ 1,900 and 2,000 guineas. If A had certain knowledge that 
B would njot give for the picture more than 1,900 guineas, 
A would probably offer to purchase it at a price slightly 
exceeding this, and at this price he would no doubt obtain 
the picture. If, however, the owner of the picture knew 
that A would give 2,000 guineas for it, rather than not 
possess it, he might pretend to hesitate about selling the 
picture to A, and might ultimately succeed in inducing 
A to offer 2,000 guineas. Demand and supply, therefore, 
determine within very narrow limits the price of all those 
commodities which may be classed under our first division. 
The notion The price which is actually realised may oscillate between 

of ' ratio ' , . . 

between de- ^^©se narrow limits, according as the vendor or purchaser 
mandand has the most skill and knowledge of trading operations. 
5g flig. Hence it appears that the price of all those articles which 
carded. are classed under our first division are regulated, not by 
a ratio between the demand and the supply, but by an 
equalisation of the demand to the supply. The notion of 
a ratio ought therefore to be discarded, since it is not a 
ratio, but an equation. 
A further A further question may now arise. Why should A be 
necessary, willing to give 2,000 guineas for a picture, which B will not 
purchase at a greater price than 1,900 guineas, and for which 
C will not bid more than 1,500 guineas? A, it is said, con- 
siders the picture worth 2,000 guineas ; but this is not a 
sufficient explanation. Why does he place this particular 
value upon the picture, whereas B and C place a less value 
upon it? A further analysis is consequently required. 
The two Value is composed of two elements, and these two elements 
value. respectively arise, firstty from the use which the individual 
Absolute niay have for the article, and secondly, from the difficulty 

utility aud . 

difficulty of iie may have in obtaining it. These two elements, which 
attainment, are the components of value, may be symbolised by the 
letters U and D. TJ is supposed to signify value, as de- 
pending upon utility, and D signifies value as depending 



The Causes ivhich regulate the Price of Commodities. 317 

on the difficulty of attainment ; both of these elements book m. 

must always be present whenever an article has an ex- . <^h- "• , 

changeable value, or, in other words, realises any price. 

No commodity can be more essentially useful than water, 

yet water has never any exchangeable value, unless there 

is some difficulty in obtaining it. It is true that in large The first 

towns water has an exchano^eable value, and it is conse- ^^'^vW^-^l' 

° . . ' . ^ in the case 

quently sold at a certain definite price, but in this case the of water. 
element T> is present, for in large towns there is a difficulty 
in obtaining water; the spontaneous supply which nature 
IDrovides soon becomes exhausted, and water has at a 
considerable outlay to be brought from a distance. On 
the other hand, no article can obtain exchangeable value 
unless the element U is present; since difficulty of attain- 
ment will not make an article valuable, unless it either 
can serve some practical use or gratify some desire. A The second 
precious stone, such as a ruby, is prized as an ornament ; ^Jl ^^^^ 
it therefore has its use, because it serves to gratify a desire, stones. 
It is generally said that rubies are very valuable, because 
they are so very difficult to obtain; but if, in consequence of 
a change in fashion or taste, they should ever cease to be 
prized as an ornament, they will then have no value at 
all, although it might be just as difficult to find a ruby as 
before. Both the- elements U and D must therefore co- 
exist in every article which has exchangeable value, for 
an article, however difficult to obtain, can have no value 
unless it is capable either of supplying some want, or 
gratifying some desire ; on the other hand, no article can 
possess exchangeable value, if it can be obtained without 
difficulty, although the article may be of prime necessity. 

It is not possible beforehand to predicate in what ^ro- The price 
portion the two elements TJ and D may combine to form '^^vp^j^- 

^ . . , . terminedby 

the value or price of any particular commodity. In almost either or 
every case the price at which an individual purchases ^^^^^^^^ 
a commodity represents in value only a very small portion ments. 
of the use or advantage which the possession of the 



3 1 8 Manual of Political Economy, 

BOOK m. article confers upon the individual who purchases it. A 

> ^^-J^- . person buys a coat for three pounds, because at this 

price a coat of the quality he requires is offered to him; 

but three pounds does not represent the use which the 

person who purchases the coat derives from it, for if he 

had the money he would no doubt give thirty guineas, 

rather than be without a coat ; therefore, in this case, the 

element U only exerts a small portion of its whole force 

in determining the price of a coat. The price is in this 

case entirely regulated by D, or, in other words, by the 

difficulty of obtaining the coat. As, however, we have 

before remarked, U, although only partially operative, can 

never be entirely absent. 

The utility The example just quoted illustrates the manner in 

can he the ^jjj^i^ {^L almost everv case, the two elements TJ and D 

sole element / ^ . „ ,. ^ . . 

operative, combine to produce the price of a commodity. U is in 
only when £^^^ almost invariably only partially operative ; this is the 

the supply j j r j r j 

isabsolutely general rule, for the case may be regarded as a very rare 
limited. exception when U ^as well as D both exert their full in- 
fluence upon the price of an article. When such a case 
does occur, the purchaser of a commodity is guided, in the 
price which he offers for it, solely and entirely by the con- 
sideration of the use he expects to derive from the article. 
This can only happen when the supply of a commodity is 
Exempli- absolutely limited. To explain this still further, let us 
former ^rt ^©^^^^ ^^ our original example, which supposes that three 
stance. persons, A, B and C, are each anxious to purchase some 
particular picture by Turner ; C will not give more than 
1,500 guineas for it, B not more than 1,900, and A ulti- 
mately purchases it at a price between 1,900 and 2,000 
guineas. With regard to C and B, 1,500 guineas and 1,900 
guineas represent the value in use, which C and B respec- 
tively place upon the picture. This, therefore, is the mone- 
tary value of the element U, according to the individual 
opinion of C and B. In A's estimation, the value of the 
element U is greater, for to him the picture has a value 



The Causes which regulate the Price of Commodities, 319 

of 2,000 guineas. As we have before said, the price which book hi. 
the picture actually realises will be some amount between - ^^- "• . 
1,900 and 2,000 guineas, because if the price sank below 
the inferior limit there would be a greater demand for the 
picture than the supply, and if' the price exceeded the 
superior limit the demand would entirely cease, because 
this superior limit denotes the greatest value in use placed 
upon the picture by the person who is most anxious to 
possess it. To recapitulate, therefore, it may be stated, 
that the following principle regulates the price of all those 
commodities whose supply is absolutely limited. The 
demand depends upon the price; the price must be such 
that the demand will exactly equal the supply. 

The value in use which an individual may happen to Value in 
set upon some particular article is the result of various j^^ ^"^^^ 
motives, which it is almost impossible to analyse. Thus 
we have seen that to an individual. A, the value in use of 
one of Turner's pictures is 2,000 guineas, for A would 
rather give this sum than be without the picture. To B, 
however, the value in use of the same picture is only 
1,900 guineas. It is quite evident that various motives 
may induce a greater value in use to be attributed to this 
picture by A than by B; A may be a much wealthier man 
than B, and money may consequently not be of so much 
importance to him. A may perhaps also have a superior 
taste for art, which makes his appreciation of a painting 
greater than that of B. A may also be influenced by a 
hope of future gain, since he may expect to realise con- 
siderable sums by granting permission to have the picture 
engraved, or he may think that after a few years have 
elapsed the demand for the works of the particular artist 
may so increase as greatly to enhance the value of the 
picture. In every case, a great variety of motives operate 
upon different individuals in determining the value in use 
which each may place upon any particular article. 

The class of articles such as these we have been con- The value 



320 



Manual of Political Economy, 



absolutely 
limited is 
often 
ohscurely 
explained. 



.BOOK TIT. sidering, whose supply is absolutely limited, is so restricted, 
. ^^- "• , that our readers may perhaps think we have analysed this 
of the class case of value or price with unnecessary minuteness. It is, 
of articles however, somewhat curious that these points of political 
economy which are apparently the most simple are usually 
treated with the greatest obscurity, for, with few exceptions, 
every writer on political economy has failed clearly to 
explain the principles which regulate the price of com- 
modities similar in character to those we have been con- 
sidering. 

In the succeeding chapter we shall analyse the causes 
which determine the price of those commodities which we 
have placed in the second of the three classes we have 
enumerated. This second class, as has been stated at 
page 312, comprises those commodities which can be in- 
creased in quantity without any practical limit, but if their 
supply is increased their production will require a greater 
proportional expenditure of labour and capital, and there- 
fore these commodities have a constant tendency to become 
more expensive as the demand for them augments. 



321 



CHAPTER III. 

ON THE PRICE OF AGRICULTURAL PRODUCE. 

WE give the above title to this chapter, because the book hi. 
commodities whose price we are now about to dis- , cn. ^ in. ^ 
cuss may be described as agricultural produce, in broad The second 
distinction to manufactured a^oods, the supply of which c^^^s of ^ 

, . 1-1 • 1 T -J 1 J j^i articles IS 

may be mcreased without any practical limit, and at the cUefiy 
same time without any increase in the cost of production. <^gt'^cuitu- 
Such commodities belong to the third and last of our duce. 
divisions, and the principles which regulate their price 
will be considered in the next chapter. 

Many causes, which are well known to all, make the They are 
price of agricultural produce vary from year to year. Our J^/g^^^J.^ 
corn markets are influenced not only by the productiveness aUefluc-^ 
of the last harvest, and by the prospects of the next, but ^^^\^^^^ ^^ 
they are also sensibly affected by the good or bad crops of 
other countries. Since so many circumstances may cause 
a great fluctuation in price, it may perhaps appear impos- 
sible to establish any general laws with regard to the price 
of agricultural produce. We shall, however, be able to 
show, that even the variations in the price of such produce, 
though constant and great, obey certain laws with strict 
regularity. 

No farmer will rent land unless he believes that the Determina- 
price at Avliich the produce of the land may be sold will, Q^.2inary^ 
on the average of years, suffice to pay his rent and all the 2^^'ofits of 
expenses of cultivation, and leave a surplus adequate to*''**'^" '^' 
remunerate him, not only for the capital he has invested 
i Y 



32 2 Manual of Political Economy. 

in tlie business, but also for his own labour of superin- 
tendence. When the farmer is fairly remunerated for his 
labour and capital he may be considered to realise the 
ordinary profits of trade. It is quite impossible that the 
prices in any particular trade can permanently be so low 
as to prevent these ordinary profits being realised, because 
no class of traders would be satisfied to continue investing 
their capital in a business if much smaller profits were 
realised from this business than from others. Hence we 
arrive at the following principle, which will prove a useful 
guide in this investigation — the price of agricultural pro- 
duce must be such as will enable farmers on the average 
of years to realise the ordinary profits of trade. 
They are The profits of the farmer have above been described as 

determined ,i i i • i • i n ii i' i. • 

by the ^^^ surplus wliich remains when all the expenses oi culti- 
average vation have been deducted from the pecuniary value of 

value of the ,-, ■\ ^ (* n rm '11 

produce "^^® annual produce oi a tarm. ihese expenses include 
after de- reiit^ the wages of labourers, the purchase of new im- 
rent. plements, the wear and tear of old implements, the loss 

which arises from the ordinary casualties to which live 
stock is liable, &c. It must be evident that any cause 
which increases the farmer's expenses must diminish his 
profits. Suppose the average annual value of the produce 
raised from a farm is 2,000^., and that the expenses of cul- 
tivation are 1,500^., the farmer having to pay 500^. in rent, 
800?. the wages of his labourers, and the remaining 200Z. be- 
ing required for various other necessary expenses, such as 
the purchase of implements, &c., which need not be enu- 
merated. Deducting the 1,500?. from the 2,000?., which is 
the annual average value of the produce of the farm, it is 
evident that the 500?. which remain would be the farmer's 
profits. Now let it be further assumed, that this 500?. is a 
fair remuneration to the farmer for his capital and labour 
of superintendence. Consequently, when his profits are 
500?., he may be considered to realise the ordinary profits 
of trade. In this case, the prices obtained for the produce, 



On the Price of xigricuUicral Produce. 323 

combined with various other conditions supposed, cause book m. 
everything to be in a state of perfect adjustment. It has, v_f^:^51i_- 
however, frequently happened, that the rent of land has in Effects of a 
the course of a few years very much risen. Let us enquire ^'-^^ ^f 

T67itS 

what will occur if the rent of this farm is increased from 
500/. to 700/. a year, whilst the price of agricultural pro- 
duce, and the expense of cultivating the farm, remain un- 
chanfijed. This increase of rent would reduce the farmer's 
profits from 500/. to 300/. ; but it has been above assumed, 
that when his profits were 500/., he obtained no more than 
the ordinary remuneration for his capital and labour of 
superintendence. He consequently receives less than the 
ordinary remuneration when his profits are reduced to 
800/. He therefore virtually cultivates his farm at a loss, 
because he would secure a larger income if he applied his 
capital and energy in some other business. Under these 
circumstances, farmers would be induced gradually to 
leave their farms, and the land would be thrown out of 
cultivation. This we know can never occur; the people 
must be fed, agricultural produce is required, and the land 
must be cultivated. We may therefore conclude, that 
neither rent, nor any other items of the expense of culti- 
vating land, such as cost of labour, can be increased, unless 
the farmer receives a compensating remuneration from a 
rise in the price of agricultural produce. Let us now, 
however, revert to Ricardo's theory of rent, in order to 
understand how a rise in rent is produced. 

This theory describes rent as a price which is paid for Cause of a 
the use of an appropriated natural monopoly. And this ^^jf/^^^^ 
monopoly arises from the fact, that the supply of fertile from 
land which can be brought under cultivation, in any par- fl^^^^lf 
ticular country, cannot be increased beyond certain limits, rent. 
The difference between the rents paid for two different 
farms represents the excess of the pecuniary value of the 
one farm above that of the other, whether derived from 
greater fertility or from superior advantages of situation. 

Y2 



324 Manual of Political Economy. 

BOOK III. The land of each country varies so greatly in fertility, that 
' — V ' > every country possesses some barren tracts which are too 
poor to be cultivated, even if granted rent free. England 
has soils of every degree of fertility, from the barrenness of 
her Yorkshire and Devonshire moors, to the rich luxuri- 
ance of the Sussex wolds. There will consequently always 
be some land which may be considered to be on the 
margin of cultivation. Such land will pay for cultivation 
if let at a merely nominal rent. Hence Ricardo's theory 
of rent defines the rent of any particular land to be the 
pecuniary measure of the degree by which it exceeds 
in fertility, and advantageous situation, that land which is 
just upon the margin of cultivation. It is evident that 
the margin of cultivation descends as the population of 
the country increases, for it becomes necessary gradually 
to resort to less fertile land, in order to supply a larger 
demand for food. But as the margin of cultivation 
descends, rents must rise, because as less fertile land is 
brought under tillage, the greater will be the difference 
between the produce raised from any particular land and 
the worst land under cultivation, and rent may be regarded 
as the pecuniary measure of this difference. The worst 
land, however, which is in cultivation at any particular time 
will only just bear a nominal rent, and does no more than 
return the ordinary rate of profit to the farmer for his 
labour and capital. If, as population increases, it is neces- 
sary to bring still worse land into cultivation, it will be 
manifestly impossible to till this land except at a loss, 
unless a rise takes place in the price of agricultural pro- 
Condmion duce. We therefore arrive at this conclusion, that the 
'price of p^ice of agricultural produce must always be such as will 
agricul- enable the ordinary rate of profit to be obtained from the 
duce. worst land in cultivation, which only pays a merely nominal 

rent. It can be easily shown, from this proposition, that 
rent is not an element of the price of agricultural produce, 
or, in other words, corn and food would not necessarily be 



On the Price of Agricultural Produce. 325 

cheaper if every farmer's rent in England were remitted book nr. 
for a term of years. This has always appeared a most .^^z^^}^ 
startling paradox to those who are unacquainted with 
political economy. 

Let it be assumed that every farmer has the rent of Proof that 
his farm remitted for the next thirty years : all the land an element 
cultivated would then be rent free. The question arises, ^'« ^^^ price 
Would this change produce any effect upon the price of J^^^^f^^^.^'." 
agricultural produce? The quantity of agricultural pro- ^^^^«- 
duce which may be required, in any particular country, is 
not affected by the amount of rent paid for the use of land. 
If, therefore, all the land of England were made rent 
free, there would be no reason to suppose that either more 
or less agricultural produce would be consumed than when 
the present rents were charged for land. The same area 
"of land would therefore have to be cultivated ; the margin 
of cultivation would neither ascend nor descend. That 
land, however, whose fertility is such as to place it just on 
the margin of cultivation, paid merely a nominal rent, even 
before the supposed change was introduced which, as we 
have imagined, has made land rent free. The price of 
agricultural produce was such as to enable the farmer to 
realise the ordinary profit of trade upon this land, which 
is so poor that it only bears a nominal rent; for the land 
would not, of course, continue to be cultivated, if the price 
of agricultural produce was not sufficient to enable such 
profit to be obtained. But even where a general remission 
of rents has been made, this particular land has still to be 
cultivated, because there is no reason to suppose that the 
country will require less agricultural produce than before. 
Hence the price of agricultural produce cannot decline in 
consequence of a remission of rents, since, if such a decline 
in price occurred, much of the land which was previously 
cultivated at a merely nominal rent would cease to return 
the ordinary rate of profit, and would therefore be thrown 
out of tillage; but this will be prevented taking place, 



326 Manual of Political Economy, 

BOOK III. because the demand for a.gricultural produce is as great as 

- ^^^'/"'- it was before. Hence it appears that, if all the land of 

the country was rent free, it would not necessarily follow 

that the price of agricultural produce would be reduced. 

It is therefore legitimate to conclude, that the price of 

agricultural produce is not affected by the payment of 

rent. The price is really determined by the demand for 

agricultural produce; because, as the demand increases, 

The price it will be necessary to resort to less fertile land. As the 

of ayricui- population of a country increases, the demand for a^ri- 

duce tends Cultural produce becomes greater. Hence the price of 

to rise as ap'ricultural produce will rise as the population of a 

population ° ^ .... r r 

increases, country advances. This rise in price will be counteracted 
hut this rise ^^ ^-j^e two followinoj ways : — 

IS partly . . 

counter- 1st. The introduction of agricultural improvements 

"^^^ may supply a country with an increased quantity of food, 

without extending the area of cultivation. 

2nd. The increased quantity of food required by a , 
country whose population is advancing may be supplied f 
by foreign importation. 
hy impor- The effect of the importation of food, either in reducing 
tatton of Q^ keeping down its price, will be fully explained in our 
remarks on international trade. The last few years must 
have afforded every one a striking example of the influence 
produced by the importation of corn. Since the year ; 
1840, an almost unexampled increase in our population 
has taken place, but so vast have been the importations of 
grain that the people have been amply supplied with food, 
without any material rise in its price. The introduction 
andhyagn- of most important agricultural improvements has been no 
culturahm- ^q^^ effectual towards meetino;' these increased demands for 

provements. . ... 

food. Drainage has produced fertility, where before all 
was useless sterility. Moreover, new agricultural imple- 
ments, such as the steam plough, may yet be destined so 
much to economise labour, that land which will not now 
pay to be cultivated may be made to return a remune- 



On the Price of Agricultural Produce. 327 

rative profit, "without any rise ioi the price of agricultural book hi. 
produce. In the absence, therefore, of agricultural im- ^ — ^. — ^ 
provements, it may be said that the price of agricultural 
produce is determined by the extent to which the demand 
for it has to be satisfied from the soil of the country itself. 

If the importation of food does not keep pace with the 
increased Avants of our advancing population, the price of 
agricultural produce must inevitably rise. 

The price of mining produce is regulated by laws very TJie price 
analo2fous to those which determine the price of asfricul- ^f^^'^^'^^ 

^ . . . . . ^ produce is 

tural produce. Mineral deposits vary in richness, in the determined 
same manner as land varies in fertility. Some mines are ^ .^^^ ^ 

•^ ^ similar to 

more expensively worked, and less advantageously situated those which 
than others, just in the same way as land may .be incon- ^^f^^*g^of 
veniently situated, because remote from markets. Suppose agHcul- 
the price of iron was to decline one half; a great number *^^^^ ^'^" 
of the existing iron mines would at once cease to return 
any profit, and would probably be worked at a very consi- 
derable loss. But people will not continue investing theix 
capital if they cannot realise upon it an adequate profit, 
and therefore such reduction in the price of iron as we 
have supposed would cause all the least productive mines 
to be shut up; the supply of this metal would consequently 
be greatly diminished. If this diminished supply sufficed 
to satisfy the demand, the reduction might be permanent. 
But if the demand was in excess of the supply, a rise 
in the price of iron must follow,, because, without such a 
rise, no adequate inducement could be offered to increase 
the supply by reopening those mines which a reduction in 
price had caused to be closed. It therefore appears, that 
the supply of iron which is forthcoming at any particular 
time depends upon the price which this metal realises, 
because the price determines what mines can be worked 
at a profit. The following adjustment must therefore take 
place; the demand varies, cceteris paribus, inversely with 
the price, for the greater is the price the less will be the 



328 Manual of Political Economy, 

demand. On the other hand, however, the supply varies 
directly with the price, because the greater is the price 
the greater, of course, will be the supply. If the price is 
too great, the supply will exceed the demand ; if the price 
is too low, the demand will exceed the supply. The price, 
therefore, must be such as to adjust the demand to the 
supply. When the price reaches, this point, it is in a 
position of equilibrium. 
There are It IS no doubt quite true, that there are constant varia- 
comtant tions in price, which prevent this position of equilibrium 
of price being continuously maintained, but this does not lessen 
about the ^\^q importance of ascertaining^ that such a position of 
price thus equilibrium really exists. The discovery that the planets 
detervaned. j^ioyg {^ ellipses was justly regarded as a most important 
scientific truth, and the importance of the discovery was 
not diminished although it was afterwards proved that the 
planets are constantly disturbed from their elliptic orbits 
by a great number of small perturbing forces. The elliptic 
orbit of a planet may be regarded as a position of stable 
equilibrium, because, as the planet is disturbed from this 
position, a force will be generated to restore equilibrium, 
and the intensity of this force, if the disturbing cause con- 
tinues, will so constantly increase, that in the end it must 
prove effectual. In a similar manner a position of stable 
equilibrium is defined, when the price of iron is such as 
to equalise the supply to the demand; the price does 
constantly oscillate about this position, but these oscilla- 
tions cannot exceed certain limits, because an agency is 
generated, as in the case of the planetary elliptic orbits, 
to restore the price to its position of equilibrium. The 
price so determined has, by Adam Smith and others, been 
termed the natural price. 



329 



CHAPTER IV. 

ON THE PRICE OF MANUFACTURED COMMODITIES. 

IN this chapter we intend to discuss the price of those book irr, 
articles which we have placed in the last of our three > ^^-J ^^- . 
divisions, because they are distinguished by the character- Commo- 
istic that their supply can be increased without involving ^*^f * ^f 
any increase in the expense of their production. We give supply can 
to such commodities the name of manufactured articles ; *^. **J^^/- 

. ' tiitely %n- 

because the name suggests the leading pomts of difference creased 
between these commodities and those whose price we have ^^^^.^^ *f " 

. , ^ creasing ike 

been considermg m the last chapter. To some it may cost of pro- 
appear that no such distinction really exists; a manufac- ^^^^^^^^• 
tured article, it might be said, is in one sense either an 
agricultural or a mineral product. A piece of linen cloth 
is woven from flax, which is in every sense of the word as 
much an agricultural product as the wheat from which a 
loaf of bread is made. Since, therefore, bread and linen 
cloth are both made from the produce of agriculture, it 
may appear that the laws which regulate the price of one 
ought to regulate the price of the other, and that, therefore, 
those laws of price which were enunciated in the last 
chapter, with regard to agricultural and mining produce, 
will equally apply in determining the price of such a com- 
modity as a piece of linen cloth. But there is this dis- 
tinction : the value of agricultural and mining produce is 
almost entirely derived from the value of the raw material; 
whereas the value of the raw material from which a 
manufactured article is made only forms a very small 



330 Manual of Political Economy. 

BOOK III. portion of the entire value of this particular article. The 
- ^^-J^- . reason of this must be manifest to all. Before a; bundle 
The value of flax can be woven into a piece of linen cloth, it must 
of the raw p^^gg through many different processes, carried on by many 
forms a different classes of labourers. Not only must all these 
small part labourers be remunerated, but tke employers of these 

of the value . , . 

ofmanu- labourers have advanced capital and invested money in 

{'oodr^ expensive machinery, and for all this outlay they must 

receive an adequate compensation. There must, therefore, 

be such a difference in the price of the flax in its raw state, 

and the price of the linen cloth into which it is woven, as 

will serve to give both to the employers and their labourers 

all this remuneration which we have just pointed out. 

The value,, therefore, of the raw material forms only a very 

small portion of the whole value of the particular article 

into which it is manufactured. It is this circumstance 

which causes the price of manufactured commodities, and 

the price of raw produce, to be regulated by very different 

laws. 

The price Unless a fresh discovery were mad^, or unless improved 

facturm ^'i'^chinery and improved methods of production are intro- 

need not duced, it is impossible, as we have already so frequently 

increase ijx* xi ^ e ' ' i -ji 

with an in- ^©marked, to mcrease the supply oi mmmg produce with- 
creased ©ut resorting to less productive sources, or to increase the 
' supply of agricultiiral produce without resorting either to 
less fertile land or to more expensive culture.. Such 
produce therefore, in the absence of counteracting circum- 
stances, must rise in price as it becomes necessary to 
increase the supply, in order to meet a larger demand. 
But the same law does not apply in the case of a manu- 
factured article. If it were known that the quantity 
of linen cloth required to? be manufactured in this country 
would increase twenty per cent, in the next two years, 
manufactuxers of linen would have to increase their pur- 
chases of raw flax by twenty per cent. This increased 
demand for flax would cause its price to rise in obedience 



On the Price of Manufactiii^ed Commodities. 331 

to tlie laws we liave demonstrated in the last chapter, and book hi. 
this rise in the price of flax would, of course, be as it were — ;,... '...■ 
shown in the price of linen ; because the manufacturers of as only one 
the linen must be compensated for the higher price which ^^Jj^^fl' 
is paid for the raw flax. But since the value of the flax their value 
forms only a very small portion of the whole value of the ^^ "J^^'^^^* 
cloth into which it is woven, it follows that the rise in the 
price of the cloth due to the rise in the price of flax will 
be, comparatively speaking, small. Thus we are informed 
that a rise of twenty per cent, in the price of flax would 
not cause the price of linen cloth to rise as much as five 
per cent. The causes, therefore, which affect the price of 
raw produce also influence the price of manufactured 
commodities, but only to an extremely limited extent. If 
we omit the very trifling rise in price, in a manufactured 
commodity, which results from an increased demand for 
the raw material, there is no reason whatever why the 
price of manufactured commodities should in any way be 
affected by an increased demand for them. An increased 
demand for linen cloth to the extent of twenty per cent, 
need not necessarily influence any of the elements of which 
the cost of production of this cloth is composed, with the 
exception of the price of the raw material. Machinery The cost of 
need not be more expensive, the wages of labour need not 0/ mawM- '^ 
necessarily rise ; and it is even quite possible to suppose thsit factures 
the production of an article may be cheapened as its supply ^^^ aTlhl 
is increased, because when commodities are manufactured supply is 

1 ^ r^ ,1 n ,■, n _L increased. 

on a large scale many 01 the processes 01 the manufacture 
can often be economised. For instance,, division of labour 
makes labour cheaper and more efficient; machinery on 
a large scale almost invariably works at less comparative 
cost than machinery on a smaller scale. A steam engine 
which would exert the same propelling force as two smaller 
engines will originally cost less than the two, will consume 
a smaller quantity of fuel, and will not require the same 
amount of labour to superintend it. It is therefore quite 



332 Manual of Political Economy, 

BOOK III. possible that an increased demand for a manufactured 

V ^^■^^' . article may diminish its price. To illustrate this, we may 

Illustration quote the following example. An' American, Mr. Nathan 

ofthispnn- Thompson, has recently invented a most ins^enious machine 

cipie from ^ , ..,. n ^ 

hoat-huild- for sawing and cuttmg, m their proper form, the planks of 
%ng ma- -wliich liffht boats are made. It has been calculated, and 

cmnery. ° . 

no doubt very correctly, that so much labour and time 
would be saved by this machine that the cost of a boat 
would be reduced at least thirty per cent. People there- 
fore confidently predicted that the machine would be 
introduced, and that boats would inevitably decline thirty 
per cent, in price ; but this is too hasty a conclusion. It 
must be remembered, that so great is the rapidity with 
which this machine works, that a very few of these machines 
would soon turn out a great many more planks than are 
required in the construction of all the boats which are 
built in a year. The demand, therefore, for boats would 
not be sufficient to keep these machines fully at work. 
This would involve considerable loss. In the first place, a 
machine, when not at work, must be regarded as capital 
lying idle, and secondly, the men who attend it would be 
employed irregularly. Such labour is always expensive, 
because a man has to receive some remuneration for the 
time when he is not at work. These machines, therefore, 
can only exert part of their effect, in reducing the price of 
boats, as long as the demand for boats is not sufficient to 
keep them actively at work. It is not improbable that 
this invention will for some time effect no sensible reduc- 
tion in the price of boats, because, in so limited a trade, 
people may hesitate to introduce expensive machines, and 
therefore boats may continue to be made according to the 
old plan, in spite of the demonstrated excellence of Mr. 
Thompson's invention. But if a very great number more 
boats were required to be made, no doubt these machines 
would be generally introduced, and nothing could then 
prevent a reduction in the price of boats proportionate to 



On the Price of Manufactured Commodities. 333 

the decrease which these machines effected in the cost of book m. 
jnaking these boats. > — ;. — '-> 

It frequently happens that the wages of the labourers ^ ^.{se in 
employed in the manufacture of a particular commodity ^^^^'"JJ.^J.'/-^ 
advance as the demand for the commodity increases. If must he 
this occurs, these particular manufactured goods will rise J2X' a 
in price, in order that the employer may be compensated rise in the 
for the higher wages he is now obliged to pay. Suppose ^^[^^^^^^^{/H 
that, at a time when the activity of the cotton manufacture their 
affords constant employment to all those accustomed to ^<^'^^^^- 
the trade, a new market for our cotton goods is suddenly 
opened. In order to satisfy this new demand the cotton 
manufacture must be extended ; new hands will have to 
be imported into the trade, and such untrained labour 
must for a time be, comparatively speaking, inefficient, and 
therefore more expensive than the labour of those who 
are accustomed to the trade. The period just preceding 
the American difficulties affords an example of that which 
we are describing. So rapidly was the cotton manufacture 
extended in consequence of the large exports of cotton 
goods to the East, that the supply of labour in the district 
proved to be quite inadequate. The manufacturers, there- 
fore, sent agents throughout the country in search of 
labourers, and in one agricultural village in the Eastern 
Counties no less 'than a hundred labourers — including men, 
women, and children — v^ere engaged for the purpose of 
being employed in some of the Lancashire mills. To 
these persons high wages were of course offered, in order 
to induce them to leave their own locality. But such 
labourers could not be worth so much as those who by 
practice had acquired skill in that trade. The regular 
Lancashire operatives, therefore, obtained a very impor- 
tant rise of wages, and it is impossible for such a rise 
of wages to occur without increasing the cost of pro- 
ducing cotton goods. The question, therefore, now arises, 
who would bear this increased cost? Would it come 



o 



34 Manual of Political Economy, 



entirely out of the manufacturer's pocket, or would it be 
borne by the purchaser of cotton goods ? The answer 
to this question will be found to involve an explanation 
of the principles by which the price of manufactured 
Proof of commodities is determined. We shall, in the first place, 
this propo- ppQye that the manufacturer will be compensated for the 
rise of wages by a rise m the prices received by him from 
the purchase of cotton goods. When discussing the subject 
of profits, we observed that the profits of each particular 
trade approximate to a certain average. The constancy 
of this average is maintained by the competition of capital. 
We do not mean to say that the profits of the butcher 
approximate to the profits of the cotton manufacturer, for 
there are causes which must create a permanent difference 
between the profits of these two trades ; the one trade is, 
and must ever be, more disagreeable than the other; in 
fact, the whole circumstances of the two trades are entirely 
The average different. But although the average profits realised in 
"^'proiitm <^iff"srent trades may greatly and permanently differ, yet 
each trade there is a certain rate of profit which may be considered 
'minedlv ^^ belong to each particular trade. Such a rate of profit 
themigra- indicates a point of equilibrium about which the average 
capUal pi'ofits of the trade may be considered to oscillate. Some- 
times they may come short of this point, sometimes they 
may go beyond it, but the competition of capital is an 
agency which is ever at work to restore the average rate 
of profit to this position of equilibrium, whenever disturbed 
from it. It is impossible precisely to tell what will be the 
average rate of profit realised in a particular business. Let 
us suppose that, in the cotton trade, it is ten per cent, upon 
the whole capital invested. There is always in this country 
a vast amount of capital ready to be exchanged from one 
investment to another, if the slightest additional profit can 
be realised. Such a rapid transfer may be regarded as a 
proof that the competition of capital is active. Having, 
therefore, assumed that the average rate of profit in the 



On the Price of Manufactured Commodities. 335 

cotton trade is ten per cent., let us attempt to trace what book in. 
will occur if the profits realised in this trade are, by some v — !, — 1^ 
disturbing cause, reduced below ten per cent. ; this being 
the natural rate of profit as determined by the competition 
of capital. 

The rise in the wages of the cotton operatives which, as Ifu-agcs 
we have above remarked, was caused by the increased '^^^^^^l^' 
demand for cotton goods for the East, was quite sufficient without an 
to have reduced the profits of the cotton manufacturers ^^rice^^pro- 
from ten to seven per cent. But if not more than seven fits mu&t 
per cent, was realised, the cotton manufacturer would '^Q trade^ 
placed in an exceptionally unfavourable position, for we affected, 
have supposed that his business, after making allowance 
for all the various circumstances connected with it, will be 
less remunerative than other branches of industry, unless 
a profit of ten per cent, can be secured. Cotton manu- 
facturers, therefore, would show an anxiety to contract, 
rather than to extend their operations, for they would be 
naturally desirous to withdraw as much capital as possible 
from their own comparatively unremunerative business, and 
place it in other more lucrative investments. The manu- 
facture of cotton goods would consequently be diminished 
just at the time when it ought to be extended, in order to 
meet the increased demand. But it is easy to show that 
such a contingency could not actually occur. An increased Rence the 
demand for cotton goods means an increased desire to^^l^^.^^, 

° , . ^ _ certain to 

possess them, accompanied with the requisite means to rise, 
purchase them. Those individuals who want cotton goods 
will much prefer to pay a somewhat higher price for them 
rather than go without them altogether. Such a higher 
price, therefore, will be offered for cotton goods as will 
compensate the manufacturer for the increased wages 
which he may be compelled to pay to his operatives. But 
the demand for a commodity is always diminished if its 
price is increased. The demand for cotton goods will not 
be so great as it would have been but for the rise in the 



33^ 



Manual of Political Economy. 



The price 
of manu- 
factures is 
therefore 
determined 
hy twojprin- 
ciples, one 
determining 
the average 
price, the 
other, the 
oscillations 
about it. 



Statement 
of these 
principles. 



price of these goods necessary to compensate the manu- 
facturer for the augmented cost of production resulting 
from a rise in the wages of labour. Hence it would ap- 
pear ;that the price of manufactured commodities is regu- 
lated by two principles. The first of these principles 
determines the average price of a commodity; that price 
which we have before described as a position of equilibrium 
from which there may be frequent temporary variations. 
The second principle accounts for these variations, and 
indicates the laws by which they are regulated. We may 
perhaps better explain our meaning by referring to an 
illustration which we have already noticed. The orbit of 
every plauet is mainly determined by the attraction of the 
sun; and its orbit, so far as it depends on this attraction, 
is accurately an ellipse. But each planet is acted upon 
by an almost infinite number of small disturbing forces, 
which cause it constantly to deviate from an accurate 
elliptic orbit. Although a planet, therefore, never con- 
tinues even for a short period to move in an ellipse, yet 
for many purposes it is sufficiently accurate to consider 
that the ellipse is its real orbit. Other phenomena how- 
ever, most important to be considered, depend entirely 
upon those small disturbing forces which produce the 
variations in a planet's elliptic orbit. Hence astronomy 
requires not only that the main cause of a planet's motion 
should be explained, but also that the laws of the disturb- 
ing forces which act upon it should be enunciated with 
equal care and precision. We will now show the analogy 
which we have been indicating, by stating the two principles 
which regulate the price of a manufactured commodity. 

1st. The price of each manufactured commodity must, 
on the average, approximate to its cost of production. We 
include, in the term cost of production, not simply the 
cost of material, and the wages of labour, but also the 
ordinary profit upon the capital employed in producing 
the particular commodity. 



On the Price of Mamifactu7'ed Commodities, 337 

2nd. The demand for a commodity varies with its price, book hi. 
and the price at any particular time must be such as to. . ^h- ^iv- ^ 
equalise the demand to the supply. 

With regard to these tv/o principles we may, remark, Theavemge 
that the first of the two controls prices in the folio wins- ^^''^^^.'*^' 

^ * 2:)Toxi'inates 

manner. The price of any manufactured commodity can- ^0 ^Ae cosi 
not either be very much in excess, or fall short of its cost ^fP^^*^^^^- 
of production. If the price were greatly in excess, the 
producer would secure very much more than, the ordinary 
rate of profit; and on the other hand,. if the jDrice of a 
commodity were much less than the cost of its production, 
the profits of those who produce the commodity will 
fall materially below the ordinary rate. But as . we have 
before said, the competition of capital must prevent the 
profits of any particular trade continuing, for a length of 
time, either above or below the ordinary rate of profit. 
With regard therefore to the price of a commodity, its cost 
of production may be regarded as a position of stable 
equilibrium, and whenever disturbed from this position, 
the competition of capital is at once brought into action, 
to restore equilibrium. Just in the same way the elliptic 
orbit of a planet may be regarded as a position of stable 
equilibrium: the planet is constantly disturbed from this 
position, but the attraction of the sun is at once brought 
into operation to restore its equilibrium. 

Although the competition of capital makes the profits The oscilla- 
of each trade tend towards a certain average rate, and in ^cUtermited 
this manner also makes the price of each commodity hy varia- 
approximate towards its cost of production, yet it is a guppjTand 
matter of ordinary observation, that there are temporary f^wia^d 
fluctuations in the prices of all commodities which corre- 
spond to the temporary variations in the profits which are 
realised in any particular trade. Such temporary fluctua- 
tions in the price of a commodity, and in the profits of any 
particular trade, are produced by variations in the demand 
and suj)2Dly. Many, striking instances of these variations 

z 



338 Manual of Political Economy. 

•BOOK III. in price, consequent on a sudden variation in the demand 

> ^'^ ' . for a commodity, are afforded by the circumstances of the 

Illustration present American civil war. Let us take the ease of the 

of the Birmingham s^un trade, which has been thrown into a state 

secondprin- „,, ••iia* pi 

ciplefrom 01 sudden activity by the American war; lor there can be 
the Bir- j^^ doubt that vast quantities of rifles have been purchased 
gun trade, in Birmingham for the Confederate, as well as for the 
Federal army. Before the demand for rifles was thus 
suddenly -stimulated, the manufacturers of rifles obtained 
just guch prices as would enable the ordinary profits of 
trade to be realised, because when any trade is in a steady 
condition, which may be regarded as its normal state, the 
competition of capital preserves a certain ordinary rate of 
profit dn every trade. If, however, an unusually large 
number of rifles are suddenly required, their price may for 
a time rise almost indefinitely above their cost of produc- 
tion; in fact, the cost of production temporarily ceases to 
be the controlling force in regulating the price. These 
high prices will, 'Of course, stimulate the manufacturers to 
the utmost activity, and the greatest possible number of 
rifles will be produced which can be manufactured by the 
available resources of the trade. But it takes some time 
to increase the supply beyond a certain point ; the workmen 
who are accustomed to the trade are limited in number, 
and new workmen cannot acquire the requisite skill with- 
out a long and tedious training; therefore the supply, of 
even a manufactured commodity, cannot be temporarily 
increased beyond a certain point, and hence a very great 
and very sudden demand for a particular commodity may 
cause it temporarily to assume the same character as those 
commodities whose price we have previously discussed*, and 
whose supply is absolutely limited in amount. 
- The price of such commodities, we have shown, must be 
so adjusted as to make the supply equal to the demand. 

* See Book n. Chap. 11. 



On the Price of Manufactured Comraodities. 339 

Hence we see tlie application of the second principle, that book ik. 

temporary variations in the price of a commodity, caused v — i^ ^' > 

by a sudden alteration in the demand, are regulated by Hence the 

the same laws as those which control the price of commodi- seco«<Zp?-m- 

, , . . aple ts the 

ties whose supply is absolutely limited; the price, m fact, sameasthat 
must be such as to equalise the demand to the supply. ''^'^'-^(^^^J^^u- 
We say that this principle only temporarily regulates the price of 
price of manufactured commodities, because as long as J^,^gJ"^/^^se 
the price of an article is in excess of its cost of production, supj:)!^/ is 
large profits are realised by those who produce it, and iJ^i^li ^ 
thus a powerful inducement is constantly held out to 
increase the supply. But as the supply is increased, the 
price will have a constant tendency to decline, until at 
length the price approximates to the cost of production of 
the commodity, and the trade is again restored to its 
normal condition. 

In order to prevent a possible misapprehension, it may TU prin- 
be important to observe, before concluding this chapter, '^^^^^^/^//^ 
that the price of a commodity must be always such, as to tion of 
equalise the demand to the supply. This principle is ^SJnT^ 
equally true, both when the price is disturbed by sudden applies in 
fluctuations in the demand and supply, and when the trade 
is in its normal condition, and the price of the commodity 
consequently approximates to its cost of production. For 
let us revert to the example just investigated, and assume 
that a rifle which is ordinarily sold at 51. becomes worth 
101., owing to a suddenly increased demand for rifles. We 
have before remarked, that, when the demand for a com- 
modity is suddenly increased, its price may temporarily 
cease to be in any way controlled by its cost of production. 
The immediate available supply is limited ; and it is there- 
fore evident, that the increased demand cannot be immedi- 
ately satisfied. The demand of those will therefore be 
first met who are willing to pay the highest price; but, as 
the price of the commodity rises, the demand for it 
diminishes. Hence the price must continue to rise, until 

Z2 



34^ Manual of Political Economy. 

at length the demand is so much decreased that it can be 
satisfied with the immediately available supply, or, in other 
Vv^ords, the demand becomes equal to the supply. 
Explana- It now Only remains to describe the process which 
rproccs^ by equalises the supply to the demand, when a commodity is 
lihich selling at its cost of production; or, in other words, when 
demand are ^ trade is not disturbed from its ordinary steady condition. 
equahsed Reverting to our previous example, let it be assumed that 
price op- the cost of producing a rifle is 51. The manufacturer of 
proximates rifles will therefore be adequately remunerated, and will 
ofprodac- obtain the ordinary profit realised in the trade, if he is 
^^^^" able to sell his rifles at 51. each. But, as has been so often 

said, the demand for any commodity varies, cceteris paribus, 
with its price. Hence it is quite possible that, when rifles 
are sold for 51, the demand for them may be either greater 
or less than the supply. If the first case should arise, and 
the demand should exceed the supply, then the price . of 
rifles would soon advance beyond 51, and the manufacturers 
of rifles would consequently obtain an exceptionally high 
rate of profit. If, on the other hand, the demand for rifles 
at 51. each should be less than the supply, the price 
would become less than 51, and the manufacturers of rifles 
would apparently continue their business at a comparative 
loss. But no branch of industry can continue to be in the 
state implied by either of the two contingencies just alluded 
to; the competition of capital will, on the one hand, 
prevent manufacturers of rifles permanently obtaining an 
exceptionally high rate of profit; and, on the other hand, 
manufacturers will refuse permanently to continue their 
business, if a greater return could be secured by employing 
their capital in some other investment. Let us, therefore, 
consider what would really take place under the circum- 
^ , stances supposed. 

Case when -'--'- 

the demand The case that we are investigating assumes that there are 
7o xc^d ^^ sudden fluctuations, either in the demand or supply, 
the supply, but that everything connected with the trade is in a steady 



On the Price of Manufactured Commodities. 341 

condition. Now the cost of producing a commodity is book m. 
composed of two elements; namely, profits upon capital, J^J^ 
and wages; and it is therefore evident, that if either of 
these elements is increased, the cost price of the com- 
modity will also be increased. Thus, when certain wages 
are paid, the cost price of a rifle may be 51., but if these 
wages have to be increased, the cost price of a rifle may 
advance from 51. to 6^. The assumption has been made, 
that if rifles are sold at 51., the demand will exceed the 
supply. Suppose that the price is slightly advanced 
beyond 51. ; the profits of the trade will thus be increased, 
an additional amount of capital will be brought into the 
trade, and the number of rifles made will be considerably 
augmented. All manufactured commodities, however, need 
skilled labour, and the requisite skill cannot be acquired 
without considerable training. Hence, when a trade has 
to be extended, comparatively untrained labourers must 
be employed. The skilled labourers already engaged in 
the trade will consequently be eagerly competed for, and 
their wages will rise. If, however, their wages should rise, 
the cost of manufacturing the commodity will increase, but 
a rise in the price of a commodity exerts an influence to 
diminish the demand; these causes will continue to 
operate, until at length the supply is made equal to the 
demand. 

We can in a similar way explain the process of equalising Case ivhcn 
the supply to the demand, when the demand for a com- ^J^^ demand 
modity selling at its cost price is less than the supply, the sup'j^Iy. 
Suppose this case to arise with regard to rifles, and let it 
be assumed that the cost price of a rifle is 51, and that at 
this price there will not be so many rifles purchased as are 
manufactured; the price of rifles must therefore decline; 
and it would seem that, if they were permanently sold at 
4Z. IO5., the manufacturers of rifles would lose by their 
trade, because they only realise the ordinary rate of profit 
even when 51. could be obtained for a rifle. It must how- 



342 Manual of Political Economy. 

BOOK III. ever be borne in mind, that some of those engaged in a 
' — '.^~L^ trade often possess special opportunities for carrying it on 



profitably; their place of business may perhaps be in an 
exceedingly favourable situation, or they may themselves 
have a special aptitude for the business in which they are 
engaged. Again, as we have remarked in a previous 
chapter, those who possess sufficient capital to carry on 
production upon a large scale often obtain an exceptionally 
high rate of profit. When, therefore, the supply of a com- 
modity exceeds the demand, two causes will exert an in- 
In loth fluence to equalise the demand to the supply. In the first 
'equalidng V^^'^^' ^^ '^^^ Supply of the Commodity is diminished, its 
force is cost price will also be diminished, because if less of the 
commodity has to be prodaced, only the most skilful 
workmen in the trade need be employed, and those only 
need continue the manufacture of the commodity who 
possess special advantages for producing it most cheaply. 
In the second place, as the price of the commodity is 
reduced, the demand for it will increase. These two 
circumstances, acting conjointly, must at length equalise 
the supply to the demand. 

We have therefore shown that, in all cases, there is a 
tendency in constant action to make the supply of a 
commodity equal to the demand. This principle is equally 
true, whether the price of a commodity is simply regulated 
by its cost of production, or whether the price temiDorarily 
ceases to be regulated by the cost of production, in conse- 
quence of sudden fluctuations, either in the supply or 
in the demand. 



343 



CHAPTER Y. 

ON MONEY. 

THE last three chapters have been devoted to an investi- book hi. 
gation of the laws which regulate the price of various . ^^;^' . 
commodities. We are aware that we have somewhat Reasonsfor 
departed from the course usually followed by political (Considering 
economists, who in the first place treat of the value oi price before 
commodities, and defer any discussion of the laws of price ^^jscussing 
until the functions of money have been fully explained, uons of 
In pursuing this course, they perhaps adopt a logical *^^^2/- 
method, because money, as a medium of exchange, must 
necessarily be involved in the meaning of the term price. 
We prefer the course adopted in the last three chapters, 
because the investigation of a subject which must always 
be complicated is rendered more difficult by speaking of 
the value of a commodity instead of its price; the public 
almost invariably speak of the price of a commodity, and 
seldom consider its value by directly estimating the quantity 
of every other commodity for which it will exchange ; 
moreover, the last three chapters, although relating to 
price, have not required anything to be assumed, with 
regard to the laws of money, which was not quite self- 
evident. 

It has been already remarked, that price is a particular Use of 
case of value. Every country, as it emerges from^ bar- *'^^*^^^' 
barism into the first stages of civilisation, has found it abso- 
lutely necessary to select some substance as a medium of 
exchange, for without such a medium every trading 



344 



Manual of Political Economy, 



BOOK III. transaction must be conducted by direct barter; the incon- 
^^' ^" venience of a system of barter is evident, for if the owner 
of a stack of corn wished to obtain clothes or fuel in ex- 
change for his corn, he would be obliged to find some 
other individuals who are willing to give him clothes and 
fuel for the corn which he offers. Commerce, hampered 
by such impediments, could never advance beyond its rude 
beginning. Consequently, in each nation, some substance 
is sure to be adopted as a medium of exchange, by the 
tacit consent of society. A medium of exchange provides 
a standard with which to compare the value of every com- 
modity, and by means of which the exchange of commodi- 
ties is facilitated in a most important degree. Any sub- 
tance may be -selected as this medium of exchange ; it 
has however been generally found most advantageous, for 
reasons which we shall presently state, to choose the 
precious metals as the medium of exchange. But various 
other substances have been used for a similar purpose by 
different nations. "The Chinese have used pressed cubes 
of tea as their money; some African tribes employ the 
shells termed cowries. We must therefore bear in mind 
that it is not essential that money should be composed of 
some of the precious metals ; whatever substance is adopted, 
by the tacit consent of society, as its medium of exchange, 
ought properly to be considered as the money of that com- 
munity. Thus, in China, money has consisted of those 
pressed cubes of tea we have spoken of; and, in Africa, 
the cowrie shells must be regarded as money. The money 
of our own, and every other country with which we are 
intimately connected, has so long been made of the pre- 
cious metals, that we are naturally led to associate money 
with one or more of the precious metals. If, however, in 
any country, some substance is made to perform the func- 
tions of money, that substance is as justly entitled to be 
considered money as our own gold and silver coin. Even 
those nations enjoy the great advantage of possessing money. 



Different 
substances 
used for 
money. 



On Money. 345 

although they estimate the value of commodities by cubes book hi. 
of tea, and by cowrie shells, and exchange their goods for ■ ^^\^' - 
these substances, instead of buying and selling, as we do, 
for gold and silver. Such money, it is true, is rude and 
inconvenient, but even the possession of the rudest money 
indicates a great advance in civilisation beyond those tribes 
who have no money at all, and who are, therefore, com- 
pelled to conduct every trading transaction by barter. 
The reason why the precious metals are almost universally 
employed as money, in preference to any other substance, 
will at once become evident by considering the purposes 
which money has to fulfil. The functions of money may The tioo 
be divided into two leadins^ classes. chief pmc- 

° tions of 

1st. Money serves as a measure of value. money. 

2nd. Money is a universal medium of exchange. 

We will proceed to consider the first of these functions. 
'Measure of value' may perhaps with advantage be re- 
placed by the expression, measure of wealth. Without ^o'^^y ^^ « 
some such measure, the amount, either of a nation's or oi value. 
an individual's wealth, could only be stated by enume- 
rating a long catalogue of commodities. Instead of saying, 
as we now do, that a certain farmer is worth 9,000^., we 
should be able to form no other estimate of his wealth 
except by making an inventory of his possessions. The 
number of cows, horses, pigs, sheep, the quantity of corn, 
&c. he possessed, would all have to be separately enume- 
rated. The value of a man's property is a meaningless 
phrase, unless there is some recognised standard of value. 
The value of a commodity is always supposed to unean 
its exchange value, for unless it has some 'exchange value 
we do not, in political economy, consider that it has any 
value at all. No commodity can be more useful than 
water, but, as we have before said, it is not wealth. It has 
in fact no value, because when, as is usually the case, it 
can be freely obtained, nothing will of course be given for 
it in exchange. But we cannot assign any meaning to the 



34^ Manual of Political Economy. 

BOOK III. exchange value of a commodity, unless we kBow for wliat 
\ ' . other commodity it is intended to be given in exchange. 
It is as correct to say, that the exchange value of a sack 
of wheat is a ton of coal, or a barrel of be®r, as it would 
be to estimate the value of the wheat by so much gold and 
silver. Everything, therefore, with regard to the value of 
commodities, or the' amount of wealth, is completely vague 
and indefinite, until society has- agreed to select some 
particular substance with which the value- of all commodi- 
Advantages ties may be compared. Such a substance becomes a uni- 
mtstand^' v^^^al standard, or measure of value, and thus has attached 
ard of to it the first of the two characters which entitles a sub- 
stance to be considered as money. It is not necessary, as 
we have before said, to select the precious metals for this 
standard of value, although the precious metals possess for 
this purpose many advantages which cannot be claimed 
by other substances^ 
ThesemigU Suppose a nation agreed to- adopt wheat as the general 
seojured by i^easure of value, the value of all commodities would be 
the use of referred to wheat as a standard, wealth would be estimated 
stances than ^7 SO many quarters of wheat, and it would, under this 
the precious supposition,, be correct to say, that the price of an article 
mo7iey. "^^^ not SO many pounds sterling, but so many quarters of 
wheat. One of the purposes, therefore, which money is 
intended to fulfil would be in this manner attained, for 
there would be one* recognised substance to which the 
Value of all other commodities might be referred. But 
when we proceed to consider the second important function 
which money is intended to perform, namely, a general 
medium of exchange, we shall at once be able to under- 
stand that it would be almost impracticable to have such 
a substance as wheat for the money of a country. 
Money is When a nation possesses not only a measure of value, 
medium of ^^^^ ^^^^ ^ general medium of exchange, every trading 
exchange, transaction is facilitated in the most important manner 
possible. There will then be a standard, by comparison 



On Money, 347 

with which, the vahie of any commodity can be ascertained, book hi. 
and when the vahie is thus known, the commodity may be . ^\^' . 
exchanged for a certain quantity of the substance thus 
chosen for the money of the country. But the funda- 
mental characteristic of money is that it is a general 
medium of exchange ; or, in other words, any commodity 
which may be required can be obtained by money. When, Impoi^tance 
therefore, an individual exchanges a commodity for money, X^g^^^^^g 
he obtains that which will give him the power of pur- 0/ money, 
chasing any article which he may require ; in this manner 
the great inconveniences of barter are obviated, for under 
a system of barter, as we have before said, a person who 
possessed one commodity could not without great difficulty 
exchange it for any commodities he might require. For 
instance, the owner of a quantity of wheat, if he wanted 
meat, fuel, or clothes, would have to search for those 
persons who might be willing to give him these articles 
in exchange for wheat. Since a universal standard of 
value is provided by money, the values of all commodities 
are, as it were, known and registered by this standard; or, 
in other words, the price of all commodities can be ascer- 
tained, since v/e have already defined the price of a com- 
modity to be its value estimated in money. Money, there- 
fore, enables the amount of wealth to be estimated, and 
when the price of commodities is ascertained, the pur- 
chasing power of any sum of money is known. 

We have now pointed out the chief purposes which Qualities 

/I'll* 

money is intended to serve, and having done so, we can at sXto?Vcy^ 
once pass on to consider the particular qualities which used for 
should be possessed by any substance which is used as ^^"^2/- 
money. In the first place, it is most important that any 
general standard or measure should vary as little as possible. 
For instance, all distances are referred to a certain standard As a stand- 
unit of lenofth. How endless would be the confusion if ^"'f ^^.^ 

^ , , value it 

this standard varied ! A mile represents the same distance should he 
as it did a century since, and therefore, when a mile is *^^^'«^'^«^^^' 



348 



Manual of Political Economy. 



Thus the 

different 

denomina' 

tions of 

money 

shoidd he 

constant. 



The value 
should not 
vary sud- 
denly. 



Advantages 
of gold and 
silver over 
other com- 
modities in 
this respect. 



mentioned, there can be no doubt whatever as to the 
distance intended to be expressed. Weight, in a similar 
manner, is referred to a certain invariable standard; and, 
therefore, if it is said that the weight of a body is so 
many tons, there can be no ambiguity as to the weight 
which is meant to be described. It is, of course, quite as 
important that a standard of value should be equally in- 
variable. In order to secure this invariability, it is not 
alone sufficient that the terms of a monetary standard 
should remain constant. The money of our own country 
is expressed in pounds, shillings, pence, &c. It is obvious 
that the money of our own country could not be an in- 
variable standard of value, unless a pound contained always 
the same amount of gold, a shilling the same amount of 
silver, and a penny the same amount of copper. This, 
therefore, points to one requisite for preserving the invaria- 
bility of a monetary standard, but it is by no means the 
only requisite. If gold and silver were liable to as great 
fluctuations in value as wheat and cotton, it is manifest 
that money would be no uniform standard of value, although 
a pound sterling might always contain the same quantity 
of gold, and a shilling the same quantity of silver. The 
vakie of wheat and cotton fluctuates with almost every 
variation in the weather, and with almost every change in 
the politics of a nation. Unpropitious seasons have often 
been so destructive to the harvest, that wheat has been 
forced up almost to a famine price. These seasons of 
scarcity are now, so far as concerns our own country, in a 
great degree obviated by free trade, -since we are now no 
longer restricted to our own soil for our supplies of corn. 
But even since the passing of free trade, there have been 
extremely great variations in the price of wheat. In the 
year 1854, wheat was 905. a quarter, in 1856 wheat was 
405. a qu.arter. The value, therefore, of any commodity 
not liable to such fluctuations as influence the price of 
wheat, would be, when compared with wheat, twice as 



On Money, 349 

great in 1856 as in 185-i, assuming that gold remained bookiii. 
constant. A ton of coals, for instance, would sell at the ^ ^ \^' • 
same money in 1856 as in 1854, but it would exchange 
for more than twice as much wheat in the former year as 
in the latter. If, therefore, wheat was chosen by a nation 
as a general standard of value instead of gold and silver, 
the value of all commodities estimated in wheat, or, in 
other words, the price of all commodities, might rise more 
than 100 per cent, in the short space of two years. Such 
great and sudden irregularities in price would throw 
commercial transactions into inextricable confusion. It is, 
therefore, evident that a substance should be selected as 
money which is subject to the smallest possible fluctua- 
tions in value; upon this quality mainly depends the 
efiSciency with which money can fulfil the functions which 
are required from it, considered as a standard of value. 

Let us now enquire what qualities money ought io As a 
possess, in order that it should become a convenient ''^^^^iian e'^ 
medium of exchange. In the first place, the substance money 
chosen as money must possess an intrinsic value of its own. fit"., ^■^^' 
This may appear to be contradicted by the fact that a trinsic 
portion of the money of our own, and several other ^^ ^^^' 
nations, consists of bank notes. In England, a person 
considers a Bank of England note for 10^. to be in every 
respect as valuable as ten sovereigns, yet the note has no 
intrinsic value whatever; thousands of such notes might 
be manufactured for a few shillings ; whereas the ten 
sovereigns for which one of these notes can be exchanged 
have an intrinsic value of their own, for if melted up, they 
would be as valuable in bullion as in coin. The bank 
note derives none of its value from the substance of which 
it is composed; it is simply a written warrant of a promise 
to pay, whenever demanded, the sum which it represents. 
If all believe that this promise is certain to be strictly 
fulfilled, there can be no reason why the note should not 
be freely accepted as money. But a nation can never 



350 Manual of Political Economy. 

BOOK III. feel this entire confidence, either in the promise of the 

CH V 

• '^-^ state or of private individuals, until government be- 
comes firmly settled, and commercial credit securely 
established. It is therefore necessary that the substance 
which is chosen as money should possess an intrinsic 
value. Now we have explained, in a former chapter, that 
a substance acquires value from the conjunction of two 
qualities: in the first place, labour must be employed to 
obtain it, for the most essential necessaries of life, such as 
water and air, have no exchangeable value, if spontane- 
ously supplied by nature; secondly, no substance can 
have value unless it can be made to satisfy some want, or 
gratify some desire of man. Hence, in order that the 
substance chosen as money should possess an intrinsic 
value, it must in the first place require labour to obtain 
it, and secondly, it must be regarded as useful for other 
purposes than being employed as money. 
and should The last requisite possessed by money upon which we 
value^iTa ^^^^ remark is, that it should be a commodity sufficiently 
small hulk, expensive to contain a great deal of value in a small bulk. 
If this were not so, whenever any valuable article was sold, 
the money which it realises would be extremely cumbrous, 
and inconvenient to carry about, in consequence of its great 
weight and bulk. If we possessed no money but our copper 
coinage, the copper money equivalent to ten sovereigns 
would be a heavy load, requiring the strength of a strong 
man to bear ; and the inconvenience would be still greater 
if a less valuable metal than copper, such as iron, were 
selected. 
Advantages Having now remarked upon the qualities which ought 
'^qoidand ^ ^^ belong to a substance which is used as money, we shall 
silver. be in a position to appreciate the great advantage which 
the precious metals possess, as money, in comparison with 
any other substances. The first requisite we have enume- 
rated is, that the substance of which money is composed 
should be liable to as few variations in value as possible, 



On Money. 351 

Gold and silver both fulfil this condition in a very striking book hi. 
manner. As a general rule, the average productiveness of _f5^Zl_y 
gold and silver mines does not vary from year to year. 
Changes of temperature so much affect the growth of agri- They do not 
cultural produce, that the abundant crop of one year may ^,^^, ^^/"''^ 
be succeeded by great scarcity in the next. Such causes, value from 
however, can in no way influence the productiveness oi^y^J^^^ 
mines. The demand for some commodities varies almost 
from day to day, and causes those constant fluctuations in 
price upon which we have remarked in the last chapter. 
Gold and silver, except when used as money, are chiefly 
employed for the manufacture of ornaments, and various 
articles of luxury. Now it is evident that the demand for 
gold and silver plate does not vary greatly from year to 
year. The last ten years may seem to offer an exception 
to the constancy in the value of the precious metals, for 
since the discovery of the gold mines of California in 1848, 
and those of Australia in 1850, the annual yield of gold 
has increased at least 300 per cent. There is no question 
of the day more important for the political economist to 
discuss than to trace the effects of these recent gold dis- 
coveries. This must be reserved for a separate chapter. 
Although it is not improbable that the value of gold may 
in future years be greatly depreciated by these gold dis- 
coveries, yet such sudden changes in the annual yield of 
gold are extremely rare. In fact, history affords no other 
similar instance, except the discovery of the gold and silver 
mines of the American continent, at the time when the 
New World first became known to the Old. It is not there- 
fore necessary for us to qualify our remark, that gold and 
silver are, as a general rule, subject to less frequent varia- 
tions in value than almost any other substances. 

The second of the enumerated qualities w^hich ought to They pas- 
belong to money is, that it should possess an intrinsic value ^^^^'^'J^^''*' 

n • TkT- • n SIC VClLliCm 

01 its own. Nations, even from a remote antiquity, have 
always placed a great value upon gold and silver. Ancient 



352 



Manual of Political Economy. 



They have 
great value 
in a small 
hulk. 



Copper 
money. 



Conve- 
nience of 
taking 
either gold 



remains ^^I'ove that the most costly and highly wrought 
ornaments have long been manufactured from gold and 
silver. It is no wonder that ornaments in every age should 
have been made from these metals; their singular bright- 
ness gives them beauty, and it is a beauty which is scarcely 
effaced by time. Iron soon rusts and decays, copper soon 
becomes corroded, but golden ornaments are dug up from 
the bogs of Ireland in almost as perfect a state of preser- 
vation as when they adorned the primaeval inhabitants of 
that island. The great malleability of gold and silver 
gives the workman abundant opportunity to display his 
artistic skill. Moreover, gold and silver have always been 
sufficiently rare to be esteemed for their scarcity. 

The great value possessed by these metals gives them 
the third essential quality which ought to belong to money; 
namely, that it should contain a great deal of value in a 
small bulk. It should also be remarked, that gold and 
silver possess other qualities which make them specially 
adapted to fulfil the functions of money; these metals are 
extremely durable, and they can be coined with facility, 
because they can be divided into portions containing any 
assigned quantity or weight. 

All these considerations combined cause gold and silver 
to fulfil the purposes of money far more completely than 
any other substances. It is true that our own country, 
and several others, have copper money in addition to gold 
and silver. Copper, though very much less valuable than 
gold or silver, is very convenient for small payments. A 
piece of gold or silver, which in value would represent a 
penny, would be almost too small an object to be per- 
ceived ; and on the other hand, if copper were used as the 
only money, any large payment would require a weight of 
copper money too great to be carried by an individual. 

Although the metallic currency of this country is com- 
posed of gold, silver, and copper money, yet it is found 
convenient that only one of these substances should be a 



On Money. 353 

general standard of value. The substance thus selected book m, 
is gold. Other countries, however, have adopted silver \^' - 
instead of gold, as a general standard of value. We shall or silver as 
be able easily to explain why gold is a better standard of H^^^^^^,^ 
value than silver. In the first place, gold is- the more 
costly metal of the two, and it therefore contains greater 
value in small bulk. Secondly, it has been found by ex- 
perience that the cost of obtaining gold, and consequently 
the value of gold, varies less than the value of silver, and 
sufi&cient has already been stated to show the importance 
of possessing, as a standard of value, that substance whose 
value is most uniform. 

It has, however, been frequently proposed to make both ^ double 
gold and silver a general standard of value, and the Is^imdesvra- 
adoption of such a plan would involve what is technically ^^^> 
termed a double standard. Yarious reasons may be stated 
which will prove that such a double standard is extremely 
undesirable. We have already pointed out the incon- 
veniences consequent upon any variations in the value of 
the substance which is adopted as the standard of value. 
Gold and silver are both liable to fluctuations in value; 
these metals, for instance, may at any time be cheapened, 
in consequence of the discovery of productive mines, and, 
on the other hand, the cost of obtaining gold and silver 
may be increased by the gradual exhaustion of the richest 
gold and silver mines. If, however, gold and silver are 
both adopted as a standard of value, the uniformity of 
this standard will be affected by variations in the value 
of two substances instead of one. For instance, let it be hecauseitis 
supposed that the value of silver is reduced five per cent, "^^fauJni 
in consequence of the discovery of some rich silver mines. "^ ^^^^ value 
Let it also be assumed that nothing has occurred to affect stanws^^ ' 
the value of gold; consequently, the value of silver, esti- 
mated in gold, will be depreciated five per cent.; or, in 
other words, an ounce of gold will exchange for five per 
cent, more silver than it did previously. Now a double 

AA 



354 Manual of Political Economy, 

BOOK III. standard implies that any person wlio has a payment to 
«— ijjn^ make can use his own discretion as to whether he shall pay 
the amount in gold or silver. If, therefore, the case we have 
just supposed should arise, and the value of silver should 
be depreciated five per cent., it is manifest that every 
person who has a debt to discharge would take advantage 
of this depreciation, and all payments would consequently 
be made in silver instead of in gold. The result would 
manifestly be, that the amount to be paid would be re- 
duced five per cent., and the amount to be received would 
consequently in every case be diminished by a similar 
amount. It is evident that this unfortunate and most 
mischievous disturbance in the terms of monetary contracts 
would be avoided if gold was the only standard of value. 
Begulations It must not be imagined that Eno^land has a double 
7erll a^^' standard, because silver and copper money form a part 
single stan- of our metallic currency. Our silver and copper money 
Enqland. ^"^st be regarded as subsidiary coins, and we are enabled, 
by a very simple arrangement, to enjoy all the advantages 
arising from the employment of such coins, without any 
of the inconveniences which belong to a double standard. 
It is fixed by law, in this country, that each silver coin 
should contain a certain quantity of silver, and it is also 
further enacted that these coins should exchange for, or, 
in other words, be equivalent in value to, a fixed quantity 
of gold. Thus a shilling always contains the same quantity 
of silver, a sovereign always contains the same quantity of 
gold, and twenty shillings are made equivalent in value to 
one sovereign. The silver, however, which is contained in 
twenty shillings is not really equivalent in value to a 
sovereign, for if the shillings were melted down, the silver 
which they contain would not purchase so large a quantity 
of gold as is contained in a' sovereign. The Mint, there- 
ford, obtains a profit on the silver which it coins; in fact, 
our silver coinage may be regarded as a slightly depreciated 
currency. The Mint, however, is not permitted to issue 



On Money. 355 

more than a certain amount of silver coinage, and the book hi. 
reason why a silver coinage is, as it were, slightly depre- . ''^^; I_ 
ciated, may be readily explained. For suppose that the Reasons for 
weiqlit of f^^old in a sovereiojn, and the weiQ:ht of silver in ^ s%^* <^e- 

... . . preciation 

a shilling, had in the first instance been so arranged that of the silver 
the quantity of silver contained in twenty shillings had coinage. 
been exactly equivalent in value to the gold contained in 
a sovereign. If this plan had been adopted, any subse- 
quent rise in the value of silver compared with gold would 
have made it profitable to melt silver coin, and sell it as 
bullion. The silver coinage of the country would thus be 
constantly liable to be absorbed, for the purpose of being 
melted down; therefore, one of two things would occur, 
either the country would soon lose its silver coinage, or 
the Mint would have to bear a heavy loss ; since, if silver 
rose in value compared with gold, the Mint would mani- 
festly lose upon all the silver they coined, and they might 
be called upon to coin an unlimited amount, as long as it 
continued profitable to melt silver coin. 

Such a contingency is, however, obviated by the judicious Eegulations 
reo-ulations which control our Mint. For since twentv ^•^^Z''^'?^'"'!' 

1 -IT Till 1 ^ • m Lngland 

shillings, although they exchange lor a sovereign, do not 
contain an amount of silver equivalent in value to a 
sovereign, it is manifestly unprofitable to melt down our 
silver coinage, and sell it as bullion, unless there should 
be a very considerable rise in the value of silver compared 
with gold. It is no doubt quite possible that such a rise in 
the value of silver may take place ; but the plan adopted 
by our Mint prevents any profit being realised by the 
melting of silver, unless the rise in the value of silver 
should be very considerable. In the currency of France, and 
the amount of silver contained in its silver coinage is much ^^"«^'^' 
more nearly equivalent in value to the gold coinage for 
which it exchanges, than is the case in our own currency. 
For instance, the gold coin termed a 'Napoleon' is said 
to represent twenty 'francs;' and if four 'five-franc' silver 

AA2 



35^ Manual of Political Economy. 



BOOK III. pieces were melted down, the silver wliich they contain is 
' ' ' as nearly as possible equivalent in value to the gold con- 
tained in a 'Napoleon.' Within the last ten years, the 
value of silver has slightly risen, in consequence of the 
large quantity of silver which has been sent to the East ; 
and the result has been, that this rise in the value of silver 
has rendered it profitable to melt the silver coinage of 
France, and sell it as bullion. The consequence of this 
has been, that almost the entire silver coinage of France 
has been melted and sold as bullion, whereas the rise in 
the value of silver has not been yet sufficient to enable a 
profit to be realised by the conversion of our own silver 
coinage into bullion. 
Reasons for We have described our own silver coinage to be, as it 
aZ!uniof^ were, a slightly depreciated currency; it might therefore 
a legal _ be supposed, that a person would incur a certain risk of 
sUver'. ^^ l^s^^ if ^^ were compelled to accept silver instead of gold, 
in payment of a debt due to him. But in order to obviate 
such an occurrence, a law has been passed, which enacts 
that silver shall not be a legal tender for any amount 
exceeding 405., and copper coinage is not a legal tender 
for any amount exceeding 5s. Silver and copper money 
may, therefore, be regarded as merely subsidiary coins; 
and we thus obtain all the advantages of having convenient 
coins to discharge the smallest payments, without any of 
the disadvantages which belong to a double standard. 



357 



CHAPTER VI. 

ON THE VALUE OF MONEY. 



TO the expression 'value of money/ an ambiguity of book m. 
meaning is attached, which it is necessary should be - — I — '-^ 
veiy clearly explained. The value of money has a popular Distinction 
signification, which is quite distinct from its scientific ^^^^"^^^ ^^'■^ 
meaning. If we peruse the 'city article' of any dsiilj and sden- 
newspaper, it will be perceived that the value of money is ^'^f ^^'^J ^^ 

. T T 1 . "^ vame oj 

considered to be synonjmaous with the current rate oi money. 
interest. Thus the value of money is said to be increasing, 
when the rate of interest is rising. The Bank of England 
is the great regulator of the money market, and the rate 
of discount which is paid for advances made at the bank 
controls the terms upon which advances are made by other 
discount houses, and fixes the interest allowed by banking 
establishments upon money deposited with them. In the 
language therefore of every-day life, the value of money is 
considered to be represented by the bank rate of discount ; 
the value of money is thus said to rise, as this rate of 
discount advances, and to fall, as the rate of discount 
declines. 

It may be gathered, from our general remarks on value Tlie scienti- 
and price, that the expression 'value of money' has another -^^^'-g^J^^.^ ^"^ 
and very different meaning. In political economy, we pression. 
estimate greatness or smallness of value by the power 
which a commodity has to obtain other commodities in 
exchange for it. If a sack of wheat will at the present 
time exchange for a greater quantity of coal, of meat, and 



35^ Manual of Political Economy. 

BOOK III. of every other commodity than it would exchange for a 
■ ^^•^^^- . twelvemonth since, it may be said that the value of wheat 
has risen. If, on the other hand, the wheat exchanged 
for a less instead of a greater quantity of coal, meat, &c., 
the value of wheat would be described as having fallen. 
In a similar manner, if a certain quantity of gold would 
at the present time exchange for a greater quantity of coal, 
of meat, and of every other commodity than it would 
exchange for a twelvemonth since, we should say that the 
value of gold had risen; on the other hand, we should 
affirm that the value of gold had declined, if the gold 
exchanged for a less, instead of a greater quantity of those 
articles which we have just enumerated. But when we 
speak of gold exchanging for a greater quantity of any 
commodity, we in fact assert that the price of this com- 
modity has fallen ; and again, when we say that gold 
exchanges for a diminished quantity of any commodity, 
we intend to signify, by "this, that the price of the com- 
modity has increased. Suppose that, a twelvemonth since, 
the gold contained in two sovereigns would exchange for 
a sack of wheat, and that now this gold exchanges for two 
sacks of wheat, it is manifest that the value of gold, esti- 
mated in wheat, has increased twofold in the course of a 
twelvemonth, and consequently the price of wheat during 
this period has diminished in the same ratio; for wheat 
has, according to our hypothesis, during the time declined 
The value in price from 405. to 20s. a sack. When therefore, in 
cJ'priceT political economy, we speak of the value of the precious 
fali, and metals, or, which is the same thing, the value of money, 
we mean the purchasing power of money, or, in other words, 
the power which money has to obtain other commodities in 
exchange for it. It must therefore be distinct^ borne in 
mind, that although men of business consider the value of 
money to be represented by the rate of interest, yet the 
signification which we here attach to the expression 'value 
of money' is such as to describe the value of money to be 



fdlh as 
•prices rise: 



On the Value of Money. 359 

great wlien prices are low, and to be small when prices are book m. 

A few lines above we have remarked, that the value oi The price 
money is the same as the value of the precious metals of ^fp^^'^ ^f 
which this money is composed. Ihis statement may per- ^xccZ hj 
haps require some elucidation. Our readers have no doubt ^^'^' 
frequently observed, that the Mint ])v\q,q of gold is 
ol. Vjs. lOJd per oz. This price is fixed by law, and if 
an individual takes gold in the form of bullion to the 
Mint, the authorities are compelled by law to purchase it 
from him, at the price of 3Z. 175. lO^d. per oz. The price 
of gold therefore, considered as metal, is by act of parlia- 
ment fixed at an invariable amount. This is not the case 
with any other metal, for we are all aware that the price 
of a ton of iron, or of a ton of tin, varies greatly from time 
to time. We will explain what is really meant by the price 
of gold being thus permanently fixed by law. 

The fixed price which is given to gold by law is not Erroneous 
unfrequently the basis of most absurd and erroneous con- <^f^^<^^^^ns 

. ^ ^ IP- from this 

elusions. We have, lor instance, seen persons who profess statement. 
to be authorities on monetary affairs decide, in the most 
off-hand manner, that the value of gold has not been 
affected by the recent gold discoveries, grounding this 
competent opinion upon the fact that the price of gold 
has remained unchanged. They say an ounce of gold 
now realises exactly the same price, namely 3^. 175. lOJd, 
as it realised ten years since. How then, they ask, can 
the value of gold decline, whilst its price remains un- 
altered ? But this constancy in the price of gold only its real 
proves that the quantity of gold in a sovereign remains ^^'^^^"^9- 
the same. The Mint authorities give 3Z. 175. lOJd for an 
ounce of gold, because they know that there is just suffi- 
cient gold in an ounce to manufacture three sovereigns, 
and that portion of a sovereign which is represented by 
175. lO^d Since, therefore, the price of gold remains 
constant, we may speak of gold and bullion as synonymous 



360 Manual of Political Economy. 

with the value of gold when converted into coin. The 
value of gold money, therefore, is regulated by the same 
laws as those which regulate the value of gold in bullion. 
In order, therefore, to investigate the value of ^ money, 
we have 'simply to apply those principles which we iave 
already enunciated as controlling the value of such com- 
modities as the precious metals. By this method we 
assimilate the value of money with the value of an ordinary 
commodity. 
Tlie value It is very important to keep most distinctly before the 
requlated student's mind, that money is composed of substances, the 
lytheor- yalue of which is regulated in the same manner as any 
oTvalue c>ther ordinary commodities of trade. The subject of 
money is rendered confused and difficult, because, in con- 
se(^uence of the phraseology which is ■ often employed, a 
belief is encouraged that there is something mysterious 
connected with every economical question relating to 
money. Our readers will recollect that, in discussing the 
laws of value and price, we divided commodities into three 
distinct classes, and these three classes were separated from 
each other respectively by the following characteristics. 
In the first class were placed all those articles whose 
supply was absolutely limited,; in the second class, all pro- 
duce was included the supply of which would, if increased, 
involve a greater proportionate expenditure of labour and 
capital; and, in the third and last class, were enumerated 
all .commodities whose supply might be increased without 
any practical limit. 
Applicable The Commodities belonging to the second class we 
luraPand described, in general terms, as agricultural and mineral 
mining produco. The laws of value and price which apply to this 
pro uce. ^j^^gg were expounded in Chapter III., Book III. We shall 
have, therefore, to apply these particular laws, in order to 
, establish the principles which regulate the value of money, ' 
because, as we have above remarked, the value of money, ' 
and the value of the precious metals of which it is com- 



On the Value of Money, 361 

posed, are synonymous expressions. It is hardly necessary book hi. 

to re^Deat, that the fundamental conclusion established in . _' / ' - 

the chapter just referred to, may be expressed in the 
following way. If the demand for agricultural or mineral 
produce renders it necessary so to increase the supply 
that resort must be had to less productive sources, the 
price, or, in other words, the value of such produce, will 
rise, in order to compensate the augmented cost of pro- 
duction. We are quite aware that this law is not brought AUhonfjh 
so distinctly or so immediately into operation, in the case tion^ofule 
of mineral as in that of agricultural produce, because ^^^ «'« cow- 

. . . r, -,. -, i-ii • cealed hy 

mmmg is lar more speculative and uncertain than agri-^/^g^^. 
culture. This uncertainty is most strikingly apparent in certainty of 
those mines which are worked for the precious metals, opertions. 
Thus the gold-digging of Australia has the character of a 
lottery. If a man cultivates a plot of ground, he can 
calculate very approximately the average produce it will 
yield, and the profit that will be left to him; but an 
Australian gold-digger cannot know beforehand whether 
the claim upon which he purchases permission to dig will 
prove a complete blank, or may contain nuggets sufficient 
to make him a rich man in a few days. Although it may 
appear impracticabk to apply the principles of political 
economy to a branch of industry so speculative and so 
irregular as gold-digging, yet the Australian diggers are 
of course influenced, in commencing and continuing gold 
mining, by the average amount of the gains realised. If 
the gold-fields become more productive, a greater number 
of diggers would of course be attracted to them, and the 
same effect would be produced if the gold that was found 
became more valuable. 

Agiicultural and mineral produce, consistently with the Causes 
law above enunciated, become more valuable, or, in other '^^^^'^^^J^^V 

' ^ ' ' raise the 

words, rise in price, as it becomes necessary to increase i^ke of 
the supply, in order to meet an increased demand. An "■i';'*"'^^'*" 

*• ^ -^ ' _ rat pi'O' 

increased demand for corn and meat is caused by an in- dace. 



362 Manual of Political Economy, 

creased consumption of food, and we are all aware of the 
various circumstances which may affect the demand for 
such minerals as coal, copper, and iron ; the demand for 
these minerals increases with every extension of com- 
Do they merce or trade. Let us, therefore, enquire, Is there any 
fhtfa&Tof chfference in the nature of the causes which may affect the 
iioWi demand for the precious metals? Gold (and the same 
remark applies to silver), is devoted to two distinct pur- 
poses. 
The two 1st. Gold is employed as an ordinary article of com- 

usesofqold. 

merce. 

2nd. Gold is the substance from which a great portion of 
the money of every country is made. A very large propor- 
tion of all the gold that exists in the world is devoted to 
the last of these two purposes. 
Gokl as Gold is, however, employed in a great variety of ways, 

purposes of ^^^^ i^ ^^ts and manufactures: But it is difficult even 
(^rt approximately to estimate the quantity which is thus 

absorbed. From the stamp which is in this country placed 
upon gold and silver plate, we are enabled to ascertain 
that the gold plate which is annually manufactured does 
not in value exceed 40,000L The most competent authori- 
ties differ greatly in their calculations with regard to the 
amount of gold which is used in jewellery, gilding, and in 
various other ways. Mr. Jacob supposed that, thirty years 
since, an amount of gold equivalent to 2,000,000^. was thus 
annually absorbed. If his estimate was correct, this 
amount has probably been now doubled ; it is, however, 
generally believed that Mr. Jacob's estimate is much too 
does not high. At any rate, the gold which is required for in- 
'fntmounl ^^i-istrial purposes cannot vary greatly from year to year. 
Jience the Hence, if the supply of gold is suddenly doubled or trebled, 
^prlduce is ^^ ^^ ^^^ twelve years since by the discovery of the rich 
chiefly used deposits in Australia and California, it is evident that the 
joi money, y^^t^q additional supply must be almost entirely converted 
into gold coinage. It therefore appears, that any increase 



I 



On the Value of Money, 36*3 

or decrease in the quantity of gold whicli is used is almost book m. 
solely determined by the amount of gold which is manu- . <^^-^^^- , 
factured into money. We must therefore, in investigating 
the demand for gold, enquire into the causes which regu- 
late the quantity of money which each country may require. 
There is little difficulty in explaining the circumstances 
which regulate the pa.rticular demand a country may have 
for the various commodities it consumes. Thus England 
needs so many sacks of wheat, because there are a certain 
number of people to be fed. The quantity of cotton goods 
which the English annually require for their own use 
varies with the price at which these goods can be sold; 
each successive reduction in price gives a greater number 
the power to purchase them, and consequently the demand 
increases as the price is reduced. England's gold coinage, 
at the present time, may be roughly estimated at 
45,000,000?. sterling ; each year, on an average, about 
2,000,000?. is perhaps added to this coinage; this, there- 
fore, may proximately be regarded as the amount of gold 
which England annually requires to maintain her metallic 
currency. But why has England this particular demand ^^^«f ^'^-^ 
for gold coinage? Why should she not keep in circulation amount of 
twice as much gold coinage ? To these questions con- ^^one?j em- 
cerning the demand for gold, we will at once proceed to 
give a distinct answer, and, in doing so, we shall point 
out the laws which regulate the distribution of the pre- 
cious metals over the various countries of the world. 

It would be better in the first place to suppose, for the ^ssumptim 
sake of simplicity, that England has no other money except simplicity. 
a metallic coinage. We will afterwards consider whether 
the conclusions which are arrived at on this supposition 
have in any way to be modified, because England pos- 
sesses paper money, such as bank notes, in addition to her 



coinage. 



It will be necessary, before proceeding to elucidate the 



General 
causes 



various principles which we shall establish in this chapter, which 



364 Manual of Political Economy. 

BOOK III. to remark upon the general causes that regulate the 

Jli:jLl_/ quantity of money which a nation requires to keep in 

determine circulation. It must be almost self-evident to our readers 

the quantity j^-]^^^ ^-j^q amount of monev which a nation needs must bear 

oj money in . . "^ 

circulation, some proportion to its wealth. Jlingland annually produces 
and accumulates a much greater amount of wealth than 
Ireland. A much larger quantity of commodities will 
therefore each year be bought and sold for money, in 
England, than in Ireland, and in order to carry on this 
exchange, a greater amount of money will be required in 
the one country than in the other. The population of 
England also much exceeds that of Ireland. English 
labourers are certainly as well remunerated as Irish labour- 
ers; wages are generally paid in money, and therefore, 
as far as the pa5rment of wages is concerned, England will 
require a much greater amount of money than Ireland. 
It is in But we need scarcely remark further upon this subject, as 
^wrtwnto ^^ i^^st be evident that the amount of money which a 
the wealth nation requires to carry on all its transactions of bujdng 
Mim^of'a ^^^ selling must bear some proportion to its wealth and 
country, population. We advisedly use the vague expression 'some 
proportion,' in order to warn our readers against the 
fallacy of supposing that the money which a country keeps 
in circulation is a measure of its national wealth. The 
error of such a supposition will be clearly shown, if for 
one moment we consider the manner in which the trade 
and commerce of a country is carried on. 
Means ly A vast amount of wealth is daily bought and sold with- 
miantity of ^^^ "^^^ transfer of any money ; in -fact, it is not too much 
money in to State, that money is rarely employed in any of those 
is econo- large transactions which constitute wholesale trade. The 
mised by Leeds manufacturer who purchases wool from the stapler 
Tit^rers.^ pays for it by a cheque, and not by gold or silver coin; and 
when he sells the cloth which he has manufactured, he 
does not receive gold or silver from the purchaser, but he 
is invariably paid by a cheque, or by a bill of exchange. 



On the Value of Money. 365 

The cheques and bills of exchange which he may have thus book m. 
issued on his own credit are returned to his bank, and the • — ;, ' . 
amount of money which they represent is deducted from 
the aggregate amount of bills and cheques which he may 
have received from others, and deposited at the same 
bank; the balance which is left represents so much wealth 
which the manufacturer keeps with his banker, either for 
jDurposes of convenience or for security. It thus appears, 
that a manufacturer who may produce in the course of a 
year 100,000^. worth of cloth, may never have in his pos- 
session a greater amount of money than is sufficient to pay 
the weekly wages of his labourers, and to make such small 
daily payments as are usually discharged by ready money. 

As another illustration, we may state that the individual For private 
whose personal expenditure is 1000?. a year, need never "^^^^^"^' 
have more than a very small amount of money in his 
possession at any one time. He will discharge all his larger 
payments by cheques, and he will only require money to 
pay the wages of his servants, and to meet small current 
daily expenses, such, for instance, as buying railway tickets, 
paying cab fares, &c. It is consequently manifest that the Hence, 
money which any individual has in his possession forms a ^aMute ^^ 
very insignificant part of his aggregate wealth. Although amount is 
it is therefore impossible to tell, from any a priori reason- '{^increases 
ing, whether the wealth of a country is fifty times or a f ^^^ ^^e 
hundred times as great as the amount of money which is weaM^and 
kept in circulation, yet it may nevertheless with certainty population. 
be concluded that, as the wealth and population of a 
country increase, a greater amount of wealth will have to 
be bought and sold for money. We say that such a con- 
clusion is certain, because although a great amount of 
wealth is exchanged without the transfer of money from 
one individual to another, yet money is required, and is 
always used in certain transactions, and these transactions 
increase both in number and in amount as the wealth and 
population of a country increase. Thus labourers receive 



-.66 



Manual of Political Economy. 



The amount 
of money is 
also affected 
by the 
number of 
commercial 
transac- 
tions. 



Two prin- 
ciples at 
which v:e 
have ar- 
rived. 



their wages in money. The wage-fund of the country 
increases with every advance in its population and wealth, 
but a larger wage-fund implies that a greater amount of 
money is employed in paying the wages of the labourers. 
Again, we have remarked, that every individual must use 
money to discharge some of his smaller payments, and we 
have also stated, that amongst those smaller payments may 
be included such transactions as the purchase of railway 
tickets, the hiring of cabs, the settling of hotel bills, &c. 
But as the wealth and population of a country increase, 
a greater amount of money will be spent in railway tickets, 
cab fares, hotel bills, &c., and, consequently, a greater 
amount of money will be required for these purposes. 

In order still further to show the difficulty of assigning 
any definite proportion between the wealth of a country 
and the amount of money kept in circulation, it may 
be mentioned that the amount of money which is re- 
quired to carry on the trade of a country may partly 
depend upon the number of times a commodity is bought 
and sold before it is consumed. To illustrate this, sup- 
pose that a sack of flour is bought and sold ten times, to 
ten different individuals, before it reaches the baker who 
bakes it, and that each time the flour is paid for in money. 
It is manifest that this buying and selling will put as much 
money in circulation, or, in other words, will require the 
use of as much coin, as if ten sacks of flour had been at 
once sold by the miller to the baker. 

Sufficient has now been said to justify us in affirming 
that the two following principles regulate the quantity of 
money which is required to be kept in circulation : 

1st. The amount of money required to be kept in circu- 
lation depends upon the amount of wealth which is ex- 
changed for money. Hence, ccBteris paribus, the amount 
of money in circulation ought to increase as the population 
and wealth of a country advance. 

2nd. The amount of money required to be kept in 



cases. 



On the Value of Money, 367 

circulation also depends upon the number of times com- book itt. 
modities are bought and sold for money, before they are . ^^-J^- ^ 
consumed. 

The question now arises — Do the causes which we have Applicatvm 
just described, as regulating the demand for the precious ^llf^n^a. 
metals, afford any explanation of the agency by which the tion of 
demand and the supply of the precious metals are made andsupvly 
to eaualise each other? — the demand never beino- in excess of gold. 

-1- o 

of the supply, or the supply in excess of the demand. 

With regard to any other commodity, there is, as we 
have shown, no difficulty in explaining this process of 
equalisation, for the adjustment of the demand to the 
supply, and vice versa, is always effected by a rise or fall 
in price. An excess in the supply beyond the demand Method ly 
means, that at the price at which any particular article of J^ ^Ifl^ted 
commerce is offered for sale, there are not sufficient pur- in other 
chasers to take off the whole quantity which is offered. 
• But this apparent superfluity is, after all, a mere question 
of price, for if the price be lowered, new purchasers will 
at once come into the market, and there will cease to be an 
excess in the supply. As soon as the price is sufficiently 
reduced there will be purchasers for the whole of the 
commodity which is offered for sale. The demand for a 
commodity always varies with its cheapness, although the 
ratio of this variation cannot be numerically defined. It 
is not only different for different commodities, but it also 
alters with every change in the economical condition of 
the country. As an example, Mr. Gladstone has been 
confident in his belief that a reduction of one hundred 
per cent, in the price of inferior French clarets will cause 
these wines to be purchased by classes of society in this 
country who never before have purchased them, and that 
therefore the consumption of this wine will increase much 
more than one hundred per cent. As another examjDle, 
it is perhaps not too much to say that at the present day 
even the poorest are generally able to obtain as much 



368 Manual of Political Economy, 

BOOK III. bread as they require, and therefore it is not probable that 
v-fi^IIl^ the demand for bread would be doubled, or, in other words, 
that twice as much bread would be consumed, even if the 
price of bread were reduced one half. But although we 
cannot beforehand define the exact point to which the 
viz. by rise price of any commodity must either rise or fall to adjust 
T/pnc^^ the demand to the supply, yet there can be no doubt with 
regard to the agency by which this adjustment is effected : 
when the demand exceeds the supply the price will rise, 
and thus diminish the demand; when, on the other hand, 
the supply exceeds the demand, the price will fall, and thus 
Doe^ this increase the demand. But it would be naturally asked, 
^'oid? ^ ^^^ ^^® demand and supply of the precious metals be ad- 
justed in the same manner? for it maybe said the price of 
gold is invariable; it is fixed by law at 3^. I7s. lO^d. an 
ounce, and therefore it would seem contradictory to assert 
that an adjustment of the demand and supply of gold is 
effected by a rise or fall in its price. This is a difficulty 
which must be clearly explained. 

We have frequently stated that the price of any com- 
modity is an expression synonymous with its value esti- 
mated in gold, or in any other substance which is selected 
as money. It is, therefore, an evident contradiction to 
speak of the demand and supply of gold being adjusted 
by a rise and faU in its price. The price of gold is, in 
fact, a meaningless expression, since, according to the 
signification which we have just attached to the word 
price, the price of gold means the value of gold estimated 
in gold, and this is a phrase which can have no meaning. 
We must Let, therefore, the expression 'value of gold' be substituted 
S/or f^^ 'P^^^® ^f S^^^> ^^^ *^^s substitution will enable us to 
price. escape from our apparent difficulty. The value of gold 
accurately varies in the inverse ratio of the price of 
commodities. If the price of all commodities rise one 
hundred per cent., the value of gold must inevitably fall 
one hundred per cent, for the same quantity of gold will 



On the Value of Money, 369 

exchange for or purchase only half as much of each com- ^ook hi. 

CTT VT 

modity. In the absence, therefore, of any counteracting • — ^^ — '^ 
circumstances, if the price of all commodities rise one 
hundred per cent., we know that twice as much gold or 
silver is required each time any commodity is purchased ; 
and there must consequently be twice as much gold and 
silver in the country circulating in the form of money. 
We are therefore able to enunciate the* following prin- 
ciple : — The amount of gold actually in circulation varies Demand 
in the direct ratio of the price of commodities. If the"^^We5 
price of all commodities rise, each purchase requires an directly ^ 

^ , n TT • 1 , with prices. 

increased amount 01 money. Hence more money is kept 
in circulation, or, in other words, the quantity of metal 
employed is increased. 

We will now attempt to give a summary, which we trust Summary 
will be intelligible to the reader, of the somewhat compli- process 
cated process by which the quantity of gold and silver 
kept in circulation is regulated. 

The greater is the quantity of coin in circulation, the 
higher, cceteris paribus, will be the price of commodities. 
But as the price of commodities rises, the value of gold, 
or the value of any other substance out of which money 
is made, declines. If the value of gold diminishes, the 
profits of the miners who produce this gold must diminish, 
and when the profits are thus reduced many will be 
discouraged from gold mining, and the supply of gold will 
consequently be also diminished. We shaU now be able 'bywMchtlie 
readily to explain the means by which the demand for gold foicuf'^'''^ 
is equalised to its supply. We will first enquire what is ^I'^^^^^sed to 
meant by a country's demand for the precious metals, and ^'^^ *"^^^^' 
in order to simphfy this enquiry, let it be supposed that 
such a metal as gold is employed for no other purpose 
except to be coined into money. This supposition will 
much simplify our investigations, and will not in any 
sensible degree affect the correctness of our ultimate 
conclusions, for, as we have before stated, the quantity 



B B 



370 Manual of Political Economy, 

BOOK in. of gold used for the ordinary purposes of art and manu- 
v_ — ; — 1^ facture is only subject to very small variations from year 

to year. 
If the According to this assumption it will be correct to say 

'^E land ^^^^ ^^ amount of gold coinage which a country requires 
•were to in- determines its demand for gold. We have already stated, 
dthertJie ^^ ^^^^ chapter, that the amount of coinage which a country 
amount of keeps in circulation is primarily regulated by the amount 
Tncrea^^^o"' ^^ wealth which is exchanged for money, and by the num- 
the value of ber of times which any of the commodities that compose 
increase. ^^^^ Wealth are bought and sold. If, in the absence of any 
counteracting circumstances, England's wealth were doubled, 
and if in every trading transaction the amount of wealth 
bought and sold were doubled, England would require 
twice as much money in order to effect her transactions of 
buying and selling. But in what sense is an increased 
amount of money necessary? What would be the con- 
sequences if a larger amount of money were not brought 
into circulation? We shall answer these questions by 
showing, in the first place, that the increased quantity of 
money is required in order to preserve general prices 
unchanged; and that, secondly, if the money were not 
forthcoming, the prices of all commodities would decline, 
or, in other words, the value of gold would be increased. 
Ilypotheti- With the view of substantiating these propositions, we 
^Z&tiqated' ^'^ investigate the following hypothetical case. Let it be 
supposed that the material wants of England's entire popu- 
lation are suddenly doubled, and that an adequate supply 
of commodities is spontaneously provided to meet this 
increased demand. According to this hypothesis the sup- 
ply of every commodity except money would be augmented ; 
each person who before purchased one loaf of bread, one 
pound of meat, and one coat, would now purchase two 
loaves, two pounds of meat, and two coats. But since he 
possesses no more money than he did when his material 
wants were satisfied with only half the amount of com- 



On the Value of Money, 371 

modities he now requires, lie and every other individual book m. 
can only now give the same quantity of money for two , ch. vi. ^ 
loaves, two pounds of meat, and two coats, as they before 7/ the de- 
gave for one loaf, one pound of meat, and one coat. If, ^^^^dfor 

1 1-1111 1 money */i- 

nowever, tins be the case, bread, meat, clothes, and every creases 
other article must have declined one half in price. It is /^^fer tJian 
thereiore evident that, 111 this imaginary case, where cir- prices fall, 
cumstances have occurred which doubled the demand for 
money without its supply being increased, the price of all 
commodities will be diminished one half, or, in other 
words, the value of gold will be doubled; buying and 
selling, however, will neither be interfered with, nor will 
the people be prevented satisfying their demand for com- 
modities, nor will less material wealth be produced and 
consumed. 

Again, it would be said that a nation requires, and ^ZU-aWa- 
therefore has a demand for, a greater quantity of coin- ^^^'^^ *^ 

' o T. J price are 

age, if her population and wealth should increase; but, undedra- 
in this case, the greater quantity of coinage is required in ^' 
order to prevent prices from decliniDg, for if the greater . 
quantity were not forthcoming, trade would not be pre- 
vented from developing, the production of wealth would 
not be stopped, but the j)i^ices of all commodities would 
inevitably decline. This general decline in price is quite 
as undesirable as a general rise in prices, for if prices either 
suddenly rise or suddenly fall the conditions of every monied 
contract are immediately altered; the annuitant, for in- 
stance, who is in the receipt of his 100^. a year, may sud- 
denly find, if there is a general rise in the price of com- 
modities, that his annual income is only one half as 
valuable, or, in other words, will only purchase him one half 
as much of the necessaries and enjoyments of life. On the 
other hand, if prices suddenly fall, the burden of any fixed 
money payment will be at once increased; thus the farmer 
who is bound to pay 500Z. a year as rent to his landlord 
might be seriously impoverished, because this 500^. would 

BB2 



372 Manual of Political Economy. 

BOOK III. represent twice as much agricultural produce. It is, there- 
CH. VI. ^ ^Q^Q^ most desirable that the value of gold should remain as 
constant as possible. Hence, if an increase of population 
and wealth causes a country to require a greater amount 
of coinage, the demand for gold and silver which is thus 
produced represents as much a real want as does the de- 
mand for food represent a desire to avert hunger. 
The average Although it is clearly important that prices should not 
Mmmodi- ^^^J} "^^^ question now arises, Why should prices happen 
ties is deter- to be what they are at any particular time ? Why, on the 
^tiie^cost of ^^^ hand, should there not have been a smaller production 
production of gold, and lowor prices — or why, on the other hand, should 
^^ ' there not be a greater production of gold, and higher 
prices? The gold mines of the world have never in one 
year yielded more than a small portion of what they might 
have yielded if more labour and capital had been employed 
upon them. But this increased amount of labour and 
capital has not been embarked in gold mining, precisely 
for the same reason that a greater quantity of labour and 
capital has not been employed upon the mines of Cornwall. 
If the price of copper was greatly increased, then copper 
mining would become a more profitable speculation. There 
would be a greater inducement offered to extend mining 
operations, and an increased amount of copper ore would 
inevitably be raised. If, on the other hand, the value of 
copper were diminished, the profits of copper mining would 
also be diminished, and a less quantity of copper ore would 
be annually raised. If, in the same way, the value of gold 
were to increase, or, in other words, if general prices were 
to decline, an increased quantity of gold would be annually 
produced. If, on the contrary, the value of gold were to 
fall, or general prices to rise, the profits of gold mining 
would be decreased, and the annual yield of gold would 
diminish, because with the diminution in the profits of 
gold mining there would be less inducement to employ 
labour and capital upon gold digging. An increase in the 



On the Value of Money, 3 7 3 



demand for gold is evidenced by a fall in the price of book m. 
commodities; but, as we have just stated, such a fall in v — ;. — '^j 
general prices stimulates an increase in the annual yield The process 
of gold, and in this manner an agency is constantly brought ^^J^*^^^^^^;^ 
into operation to equalise the supply of gold to the demand, sup'piy and 
or, in other words, to preserve a uniformity of general prices. f^T^'^^ ^-^ 
The process is exactly analogous to the equalisation in the peculiar to 
demand and supply of every other commodity. If the f^l^^^{^^ 
demand for cotton goods increases, the price or value of value for 
cotton goods will rise, but a rise in the price of cotton -^^^'^^' 
goods causes their supply to be also increased. The 
reason, therefore, why there is an apparent exception in the 
case of gold arises from this circumstance. An active 
demand for any other commodity is characterised by a rise 
in its price or value. The same holds true with regard 
to gold, but since we cannot speak of the price of gold, we 
are compelled to say that an increased demand for gold 
signifies a rise in its value, but a rise in the value of gold 
can only be shown by a fall in general prices. 

The leading propositions which we have established in Recapltula- 
this chapter are briefly these: — If the demand for gold 
increases without the sources of its supply becoming 
more productive, the increased quantity of gold required 
will be obtained at a greater cost, and the result must be 
that the value of gold will rise. An increase in the value 
of gold must be shown by a fall in general prices, since 
the price of gold cannot vary in those countries where this 
metal is adopted as a monetary standard. If, on the other 
hand, rich gold mines should be discovered, and the cost 
of obtaining gold should be lessened, the supply of 
gold will be increased, and its value must inevitably 
decline, unless circumstances should simultaneously hap- 
pen which should cause various countries to require a 
greater amount of gold money. If such circumstances 
should occur, an increase in the demand for gold 
might be created, and the whole of the additional gold 



374 Manual of Political Economy. 

yielded might be absorbed without the value of this metal 
being decreased. If, on the other hand, no circumstances 
should occur to increase the demand for gold, the in- 
crease in the supply of gold must cause a decrease in its 
value. But a diminution in the value of gold, or, in other 
words, a rise in general prices, creates an increased employ- 
ment for gold, because if the price of a commodity is in- 
creased, a greater amount of money is required to be used 
each time a commodity is bought and sold. In this way the 
supply of gold will be always equalised to the demand, 
because, as the value of gold becomes depreciated by an 
increased supply, the demand for gold will also be increased 
in exact proportion to the amount of this depreciation. 
Thus, if the value of gold is decreased one half, or, in other 
words, general prices are doubled, the quantity of gold 
money required will also be doubled. This process of 
equalisation is moreover assisted by the two following 
circumstances : 
Circum- In the first place, as the value of gold diminishes, a 
^r^ht nd S^^^^^^ quantity of it will be used for purposes of art and 
to equalise manufacture, and in this way a portion of the additional 

ttt^up.^ 'supply of gold ""^y ^^ absorbed. 

l^lyofgolcl. In the second place, a decrease in the value of gold 

exerts an influence to limit the supply, because gold 

mining will be rendered less profitable, and therefore the 

least productive mines may gradually cease to be worked. 

We shall show, in a future chapter, that the principles just 

enumerated have a very important practical bearing when 

we proceed to discuss the effects which have been produced 

by the recent gold discoveries in Australia and California. 

We have, in this chapter, explained the manner in which 

"the demand for gold is equalised to its supply in the case 

'Of the countries which produce it, but other countries, such 

as our own, yield no gold; we obtain it entirely as an 

imported commodity. It will be therefore necessary for us 

to call to our aid the principles of international trade, in 



On the Value of Money, 375 

order to explain how the quantity of gold is regulated book m. 
which a country like our own annually retains lor the ^ — 
pnii)Oses of coinage. We will therefore proceed to con- 
sider the subject of international trade m the next 
chapter. 



37^ 



CHAPTER YII. 

FOREIGN COMMERCE OR INTERNATIONAL TRADE. 

THE advantages which a country derives from foreign 
commerce must be patent to the most casual observer. 
Advan- By foreign commerce a country obtains various com- 
interna- ^^odities which she cannot produce herself, because perhaps 
tional either her people do not possess the requisite skill, or her 
climate and other circumstances of her physical condition 
are unsuited to the growth and manufacture of the pro- 
ducts in question. Foreign commerce therefore extends 
the range of man's enjoyments; he is not confined to the 
products of his own soil, but commodities are brought 
from every region of the world to minister to his wants. 
But foreign commerce confers upon man a second advan- 
tage, and one equally important, for a single example will 
show how greatly foreign trade stimulates the production of 
wealth by increasing the efficiency of labour and capital. 
The mutual If we Consider the economical condition of two countries, 
gained hy "^^ ^hall at once perceive that there is the greatest possible 
France variation in the relative advantages which they possess for 
wheat to ^^^^ production of various commodities. For instance, the 
England happy mixture of coal and iron-stone, in alternate seams. 
ware. gives England a most striking advantage in the manu- 
facture of hardware. On the other hand, a country like 
France has peculiar facilities for the growth of wheat ; her 
land is fertile and its rent low, and her labour is cheap. 
Wheat therefore will be cheaper in France than in England, 
and hardware will be cheaper in England than in France. 



Foreign Commerce or International Trade. 2>77 

It will therefore manifestly be to the advantage of each i^ook tit. 
country to exchange wheat for hardware. The full amount ^ — ^. — 1^ 
of this advantage may be estimated in the following 
manner : — Suppose that in France the production of a ton 
of pig iron requires as much labour and capital as the 
production of twenty sacks of wheat, but that in England 
the same quantity of iron requires as much labour and 
capital as would produce ten sacks of wheat ; then iron, 
estimated in wheat, is twice as valuable in France as in 
England. England therefore might say to France — It will 
be greatly to our mutual advantage if you will let me supply 
you with iron, and receive from you wheat in exchange 
for it. For suppose you give me fifteen sacks of wheat 
for each ton of iron that I send you, then we shall each gain 
five sacks of wheat on every transaction; if you manufac- 
ture the ton of iron yourself, it would cost you as much as 
twenty sacks of wheat, whereas you only have to give me 
fifteen sacks. On the other hand, I should only be able to 
get ten sacks of wheat for a ton of iron, if I sold the iron 
in my own country. We therefore each of us obtain a 
profit upon the transaction, which is represented in value 
by five sacks of wheat. This is a great gain, and a great 
saving of wealth, for the gain is made at no one's ex- 
pense. 

In order that two countries should enjoy those striking TMs ad- 
ad vantages which we have just pointed out as resulting ^^^^^^^ 
from foreign commerce, it is not necessary that of the two gained 
commodities exchanged the first should be dearer in the J^/IJ^^^JJ^ 
one country than in the other, and that the second com- of two arti- 
modity should be cheaper; all that is necessary is that in ^^4jferL« 
the two countries there should be a difference in the relative P'»'oportion 
value of the commodities which are exchanged. It is very other in 
important to bear this remark in mind, and we will illus- different 
trate its truth by an example. Suppose the cost price 
of a ton of iron produced in France is 30^., and that the 
price of a sack of wheat is 305. ; a ton of iron would 



o 



78 Manual of Political Economy. 



BOOK iiT. therefore, in accordance with the supposition above made, 
^cH.jir. exchange in France for twenty sacks of wheat. But, in 
England, a ton of iron is supposed to exchange for only 
ten sacks of wheat. Let it therefore be considered that a 
ton of iron in England is worth 10?., and that a sack of 
wheat is worth 11. Wheat and iron are therefore both 
cheaper in England than in France, but iron is three times 
as dear in France as in England, and wheat is only one 
and a half times as dear. There is therefore a difference 
in the relative value of wheat and iron in the two countries, 
and hence a foreign trade in these two commodities can 
be carried on with great advantage to the two countries 
concerned. For if England gives France a ton of iron in 
exchange for fifteen sacks of wheat, each country will upon 
the transaction obtain a profit which in value is to be 
estimated at five sacks of wheat. But all the gain which 
arises from this exchange would be at once lost if there 
were no difference in the relative value of wheat and iron 
in the two countries, for if wheat as well as iron were three 
times as dear in France as in England, it would be im- 
possible for England or France to realise any profit by 
exchanging iron for wheat ; the transaction would involve 
heavy loss to each party, because there would be no profit 
to counterbalance the expense involved in exporting the 
commodities from one country to the other. 
Cost of In explaining the profit realised by two countries from 

carnage. ^qj.q{^ commerce, WO omitted to mention the cost of 
carrying these commodities from one country to the other. 
This cost of carriage has, of course, to be deducted when 
estimating the aggregate gain resulting from foreign trade. 
We shall have not only to consider this item, but we must 
be careful to point out the causes which fix the exact 
portion of the whole cost of carriage which is borne by 
each of the two countries. It will, however, much simplify 
our investigations if for the present we omit any consider- 
ation of the cost of carriage. Upon this hypothesis we 



Foreign Commerce or International Trade, 379 

shall be more readily enabled to expound the principles book itt. 
of international trade, and we shall afterwards have no , ^^•^^": , 
difficulty in applying to these principles any modifications 
which it may be necessary to make in consequence of the 
expense which is involved in transporting commodities 
from one country to another. 

In order still more to simplify the subject, we will, m. If com- 
the first place, consider that England's foreign commerce ^^^^^^g^ 
is restricted to one country, and that her exports to this restricted to 
country, and her imports from it, are confined to two com- ^^ ^'^''^^ ^^ 
modities. Let us revert to our former example, and ' 
assume that England's foreign commerce consists entirely 
in sending iron to France, and receiving wheat in exchange 
for it. As yet our only object has been to prove that 
England and France might both realise considerable 
profit if there was a difference in the relative value of 
wheat and iron in the two countries. We have shown 
above, that upon every ton of iron exported, England and 
France might both obtain a profit equal in value to five 
sacks of wheat, if a ton of iron were worth respectively 
twenty sacks of wheat in France, and ten sacks in England : 
this particular profit would manifestly be realised if 
fifteen sacks of wheat were given for one ton of iron. But what would 
the question now arises. Is it necessary that these, and ^S^^.^^'"^ 
no others, should be the terms of the bargain? Why should change? 
not twelve sacks of wheat instead of fifteen sacks be given 
for each ton of iron ? The trade would still be highly re- 
munerative to each country, although the profit resulting 
from the transaction would now be unequally instead of 
equally distributed, for France would obtain a profit re- 
presented by eight sacks of wheat upon each ton of iron 
exported from England, whereas the profit realised by 
England upon the same transaction would be no more than 
two sacks of wheat. Our readers may be sure that the 
terms of such a bargain are not regulated by blind chance ; 
the buyer and seller in the transactions of international 



380 Manual of Political Economy. 

BOOK III. trade are shrewd merchants, whose business it is to buy 
, — '^L^ as cheaply as they can and to sell as dearly. We will at 

once proceed to explain the principles which regulate all 

the bargains of international trade. 
The 'process If England could receive fifteen sacks of wheat for 

^e^uaiisathl ^^^^J ^^^ ^^ ^^^^"^ ^^^ exported to France, the quantity of 

of mpply iron which she would be willing to export upon these terms 

Z^and% liT^ight be greatly in excess of the quantity of iron which 

effected in France requires. If this be so, then the supply of iron to 

fimilar^o^ France would manifestly be in excess of the demand ; we 

that which therefore have to consider how the supply may be equalised 

hi home^^ ^^ *^® demand, and we shall discover that the process by 

trade. which this equalisation is effected exactly resembles that 

process of equalisation which takes place in the case of 

commodities which are bought and sold in the country 

where they are produced. 

We have already seen that, when the supply of any com- 
modity is in excess of the demand, the commodity must be 
cheapened in order to equalise the supply to the demand, 
for by cheapening the commodity its supply will be dimin- 
ished, and the demand for it will be increased. England, 
therefore, will be compelled to offer her iron to Fra.nce on 
more favourable terms, if the quantity of iron which Eng- 
land exports is more than sufficient to meet the demand 
which France has for iron. Let it therefore be assumed 
that France only gives England fourteen sacks of wheat 
instead of fifteen for each ton of iron. This change in the 
terms of the bargain will manifestly exert an influence in 
two distinct ways towards equalising the demand for iron 
in France to the supply which is imported from England. 
An in- In the first place, the profit obtained upon the transac- 

creased de- ^^^^ -|^ ^-j^^ English manufacturer of iron will be diminished, 

tnand of '^ ^ ^ ^ . ' 

one country and therefore he will be induced to export a less quantity 
{luce^o/the °^ ^^^^ *^ France than he did when fifteen sacks of wheat 
other makes were given for each ton of iron. The supply of iron to 
the urms -^^2i.nQQ wiU in this manner be decreased, and at the same 



Foreign Commerce or International Trade. 381 

time tlie demand for iron in France will be increased, bookiii. 

because if any commodity is cheaper the demand for it - — 1^ 1^ 

always becomes greater, and iron must manifestly be Uss favour^ 
cheapened in France if fourteen sacks of wheat instead *^^^ ^^ *^' 
of fifteen are given for each ton of this metal which is im- 
ported. If, however, this alteration in the terms of the 
bargain is not sufficient to equalise the demand to the 
supply, and if the quantity of iron which England is willing 
to export still exceeds the quantity which France re- 
quires, the terms of the bargain must be further altered 
in the same direction. It may, therefore, be assumed 
that England will be compelled to offer France iron at 
the rate of thirteen instead of fourteen sacks of wheat 
for each ton of metal exported. Let it, therefore, be sup- 
posed that these are the terms upon which this interna- 
tional trade is finally adjusted; thirteen sacks of wheat 
being exchanged for one ton of iron. Some important 
propositions may be deduced from the description which 
has just been given of the internal mechanism which re- 
gulates the bargains of international trade. 

As an example, the reader will observe that the whole or, thepro* 
profit which accrues upon each transaction of international country is 
commerce is shared, between the two trading countries, in *^ ^^ «i-, 
the inverse ratio of the demand which one country has ^^ ^^ ^q. 
for the commodity which it imports from the other. Thus, mandfor 
in the case of the trade between France and England, we g^^ goods. 
have considered that the partition of the profit is made 
according to the following ratio : — England upon each ton 
of iron exported obtains a profit equal in value to three 
sacks of wheat, whereas the profit secured by France is 
seven sacks of wheat, or, in other words, more than twice 
as much as that which falls to the lot of England. But if 
the demand for iron in France should increase, France 
would obtain a smaller share of the profit, and England of 
course a greater share. This proposition, after what has 
been stated, can scarcely need any explanation. When 



382 Manual of Political Economy, 

BOOK ni. thirteen sacks of wheat are given for one ton of iron, 
ca. jii. j^Q^Q ig a^ certain definite quantity of iron which England 
is willing to export upon these terms. But if this par- 
ticular quantity of iron no longer satisfies the demand of 
France, then France, in order to induce England to send 
her more iron, must offer higher terms for this iron; and 
thus France may, in consequence of her increased demand 
for iron, be compelled to give fourteen sacks of wheat 
instead of thirteen for each ton of iron, and the whole pro- 
fit of the transaction will then be divided between France 
and England in the ratio of six to four, instead of in 
the ratio of seven to three. 
Effects of Let US next enquire what will be the effect upon the 
theVostof I'^tio in which the aggregate profits are divided if the 
production production of one of the commodities interchanged is 
%f comma- cheaj)ened in England, but not in France. Suppose that 
dities ex- in England some rich deposits of iron ore are discovered, 
aa7ig . ^^ that, in the process of smelting, some improvements 
are introduced which France has not perhaps either the 
appliances or the enterprise to adopt. The cost of pro- 
ducing iron might in this manner be so materially 
diminished in England that a ton of iron will become 
equivalent in value to eight sacks of wheat instead of ten, 
while at the same time there is no diminution in the cost 
of producing iron in France ; and therefore in that country 
a ton of iron, if no supplies were obtained from other 
countries, would be still equivalent in value to twenty sacks 
of wheat. The whole profit which will now result from 
the interchange of iron for wheat between England and 
France will be represented by twelve sacks of wheat, 
instead of by ten. The question therefore arises. Will 
England be able to appropriate to herself the whole of the 
additional profit? That she will be able to do so may at 
first sight seem probable, because the improvements or 
discoveries which have cheapened the cost of iron are due 
entirely to her, and have as yet exerted no effect in 



Foreign Commerce or International Trade. 383 

diminishing the cost of producing iron in France. England book hi. 
has been obtaining, as we have supposed, thirteen sacks of ■ — ^ — 1^ 
wheat for each ton of iron ; if France was still to carry on it docs not 
the commerce upon these terms, now that a ton of iron ff^^'^ ^^f 
is only worth eight sacks of wheat in England, the in which 
profit obtained by England would be increased from three *^^P^^- , 
sacks of wheat to five sacks of wheat, or, in other words, cheapened 
she would appropriate to herself the whole advantage ^''^^^ thTad- 
arising from the diminished cost of iron ; France still vantage. 
having to give for iron exactly what she did before. But 
the competition of the English iron masters will inevitably 
prevent this taking place, for directly they find that the 
profits obtained upon the export of iron to France are so 
greatly increased, they will be anxious to send a much 
larger quantity of iron to France ; iron will, in fact, be 
forced upon the French markets, greatly in excess of the 
quantity required. This is sure to be the case, since 
before increased exports of iron were encouraged by high 
profits, the demand for iron in France was exactly equalised 
to its supply. The terms upon which the trade between 
France and England is conducted must become less 
favourable to the latter country, in order, on the one hand, 
to induce England to export less iron, and, on the other 
hand, to induce France to purchase a greater quantity of 
the iron imported from England. In this manner England 
may be compelled to exchange only eleven, or even ten 
sacks of wheat, for each ton of iron. We have here simply 
to repeat, what was stated in the case above analysed, that 
the terms upon which the bargain is finally adjusted 
depend entirely upon the equalisation of the demand to 
the supply. If, when a ton of iron is exchanged for eleven 
sacks of wheat, the quantity of iron sent to France is in 
excess of that which she requires, the terms of the 
exchange must be still further reduced; perhaps, when 
only ten sacks of wheat are given for one ton of iron, the 
demand for iron in France may be exactly equal to the 




Manual of Political Economy. 

supply, and if this be so, then ten sacks of wheat for one 
ton of iron will be the terms upon which the exchange is 
finally adjusted. But if this were so, it is manifest that 
France must then have obtained a greater portion of the 
profit which arises from the diminished cost of producing 
iron, even although this diminution in the cost of produc- 
ing iron has been confined entirely to England ; for if ten 
sacks of wheat are given for a ton of iron, the profit 
secured by France upon each ton of iron she imports will 
be an equivalent in value to ten sacks of wheat, whereas 
the profit secured by England will be only two sacks of 
wheat. This is a smaller profit than she obtained before 
the cost of producing the iron she exports was reduced, 
and therefore it would appear that France, instead of 
England, has been able to appropriate the whole of the 
additional profit. This may appear to be a paradoxical 
result, but it is one which it is very possible may really 
occur. 
The 'Profit We have in this chapter spoken so frequently of the 
arising profit which arises from international trade, that our 
national readers may naturally ask, Into whose possession does this 
trade is profit fall? When England obtains a profit of five sacks 
amongst of wheat upon each ton of iron she exports, is this profit 
the whole golely enjoyed by the English merchant, and the English 
iron master, or is it distributed amongst the great body of 
the English nation? To this important question v/e can 
at once reply, the profit arising from international trade is 
due to a saving of labour and capital, and this profit cannot 
be entirely usurped by the merchants, or by those who 
produce the commodity exported; but the profit is dis- 
tributed amongst the great body of the people who con- 
sume the imported commodity: a priori reasoning will 
readily prove that the gain which results from international 
trade cannot be entirely engrossed by the merchant or the 
producer of the exported commodity, for we trust that our 
readers have now become familiar with the conception, that 



Foreign Commerce or International Trade, 385 

the competition of capital reduces the profits of every trade book iit. 

and industry to a certain uniform rate, if proper allowance . ^'^'J"' . 

is made for circumstances, such as the exceptionally great 

risks which belong to some departments of industrj^ Now 

we have seen that the gain which England derives from 

her trade with France may amount in value to as much 

as five sacks of wheat upon each ton of iron exported. 

This will represent a profit of fifty per cent., because in 

England it has been supposed that a ton of iron is worth 

no more than ten sacks of wheat. But if the English 

iron masters v/ere obtaining such a profit as fifty per cent., 

every one would be anxious to join the business, in order 

to participate in these great gains ; an intense competition 

would inevitably ensue, which would be certain in a short 

time to make the manufacture of iron not more profitable 

than other branches of industry. But if the profit of 

international trade is distributed amongst the whole body 

of those who consume the imported commodity, we have 

next to enquire into the process by which this distribution 

is effected. 

We have supposed that in France a ton of iron costs as Process ly 

T, 1 ,, irixi • lohich this 

much to produce as twenty sacks 01 wheat, whereas m -^ effected. 
England the production of a ton of iron only costs as much 
OS, ten sacks of wheat. It is therefore evident, supposing 
there were no foreign commerce between the two countries, 
that the price of iron would be 201. a ton in France, when 
the price of wheat there was 11. per sack, and that in 
England the price of a ton of iron would be 151., when the 
price of wheat in England was 305. a sack. What effect 
would be produced upon the price of these commodities by 
a commerce between the two countries ? In order to in- 
vestigate the question which has just been put, let it be 
supposed that France gives England fifteen sacks of wheat 
for each ton of iron; a ton of iron must now, therefore, 
in each country, be worth as much as fifteen sacks of wheat, 
for how can a ton of iron in France continue to be worth 

cc 



386 Manual of Political Economy, 

BOOK III. twenty sacks of wheat, when France can obtain as much 
CH. VII. jpQj^ g^g g]^Q requires by offering England fifteen sacks of 
wheat for each ton of the metal; and who again, in Eng- 
land, will now any longer exchange a ton of iron for ten 
sacks of wheat, when France gives fifteen sacks of wheat 
for each ton of iron that is exported. The value of iron 
therefore, if estimated in wheat, appears to have risen in 
England, and to have declined in France ; for, considering 
the question from a different point of view, we may say 
that the value of wheat, estimated in iron, has fallen in 
England ; whereas, on the other hand, it has risen in France. 
Foreign commerce has therefore, in each country, produced 
a change in the relative value of these two commodities. 
The price of a ton of iron will now, in France, be no longer 
equivalent in price to twenty sacks of wheat. In the same 
way the price of a ton of iron will, in England, be no longer 
equivalent to the price of ten sacks of wheat, for since in 
each country a ton of iron now exchanges for fifteen sacks 
of wheat, the price of a ton of iron must now in each 
country be equivalent in price to fifteen sacks of wheat. 
If, therefore, in England, a ton of iron still continues to 
sell for 10^., fifteen sacks of wheat will only sell for 101. ; 
or, in other words, wheat will be 13s. 4c?. a sack; and if, in 
the same manner, wheat continues to be 1^. per sack in 
France, a ton of iron will there sell for 15^.; there will 
therefore have been a reduction of twenty-five per cent, in 
The price i^s price, for before, a ton of iron sold for 201. Hence it 
of the im- appears that the effect of foreign commerce between two 
modityls countries is to reduce the price, in each country, of the 
lowered in commodity which is imported; wheat will be reduced in 
ing country, price in England, and iron will be reduced in price in 
France, and the persons who consume wheat in England, 
and those who use iron in France, will consequently have 
distributed amongst them the gain which results from 
international trade. In fact, the main effect of foreign 
commerce is to increase the efficiency of labour and 



Foreign Commerce or International Trade, 387 

capital ; foreign commerce causes labour and capital to be book in. 
ai^plied in such a manner as will make them most pro- .^^- J"- . 
ductive of wealth. According to our assumption, England 
possesses peculiar advantages for the manufacture of iron, 
whereas France is much better adapted to gi'ow wheat 
than to produce iron. Each country must therefore be 
mutually benefited, if England produces iron for France, 
and France grows wheat for England. 

We do not pretend to say that the figures above given The price 
represent with numerical exactness the reduction in the ^Lrtedcom' 
price of iron and wheat which would actually occur. Upon rnodity is 
the hypothesis we have made, wheat will in England be ^afectfdin 
reduced in price to 135. 4d a sack, and iron will in France ^^^e country 
be reduced to \hl. a ton, if we suppose that the price Qf ^^<^^^^"^^ 
iron in England, and the price of wheat in France, are 
unaffected by the international trade between these two 
countries. But we shall be able to show that this will not, 
as a general rule, be the case. Let it, for instance, be 
assumed that 500,000 tons of iron is the quantity which 
England each year requires for her own use, and that she 
annually exports to France 100,000 tons; the question 
will then be suggested. Will the price of iron be raised in 
consequence of the additional 100,000 tons of iron which 
have annually to be produced for export to France ? If no 
rise of price results, the price of iron will be unaf- 
fected by foreign trade. But we have shown, in Chapter 
III. Book III., that the price of minerals is regulated by 
laws analogous to those which control the price of agri- 
cultural produce. Consequently, in the absence of any 
counteracting circumstances, the price of iron must rise if 
its supply has to be increased, because less productive veins 
of iron-stone will have to be worked in order to obtain 
\ the additional 100,000 tons of iron annually exported to 
France. These considerations show that the price of iron 
may very possibly in England be advanced from 10^. to 
Vll. a ton; if this be so, the importation of wheat from 

CC2 



o 



88 Manual of Political Economy, 



BOOK III. France will not cause so great a reduction in its price as 

v_^^ — '-^ that we have above supposed, for although England may 

still obtain fifteen sacks of wheat for one ton of iron, yet 

this ton of iron is now worth 12Z.; the fifteen sacks of 

wheat will therefore be worth 12^.; or, in other vfords, 

wheat will in England be 165., instead of 18s. 4<d. a 

sack. 

Itmayle We trust that it has now been made evident to our 

^tlmt7he readers, that it is not the traders, or merchants, but the 

'benefits of consumers of imported commodities who derive the greatest 

interna- -, ,^ , n n • a • i 

tionaltrade benefit irom loreign commerce. A cursory view, however, 
are at the Qf -j^j^e subiect may perhaps induce some to believe that 

cost of one j ± .l 

class of the advantage which we have pointed out as resulting 
traders. fi-om foreign commerce is in a great degree counteracted 
by the pecuniary loss which is inflicted upon the home 
producers of those foreign commodities which are reduced 
in price by foreign importation. For instance, with refer- 
ence to the trade in wheat and iron which we have sup- 
posed to exist between France and England, it may be said, 
that, though there can be no doubt as to the benefit con- 
ferred upon the English nation by a reduction in the price 
of wheat from SOs. to 16s. a sack, it should on the other 
hand not be forgotten that this reduction in price must 
inflict serious loss upon the English growers of wheat, and 
that therefore the community is benefited at the expense 
of one class of traders. Such an opinion may no doubt be 
still entertained by many, although it indicates a complete 
ignorance of the principles of international trade. This 
opinion, in fact, formed the ground-work upon which 
were based all the fallacious arguments of those who advo- 
cated protective duties. We will therefore proceed to 
explain the manner in which the position of the home- 
producer of a commodity is affected when the price of the 
commodity is reduced by foreign importation. 
Proof that In the example above investigated, the hypothesis has 
been made, that 100,000 tons of iron are each year sent to 



Foreign Commerce or Inter national Trade, 389 

France, for which England obtains in exchange 1,500,000 book hi. 
sacks of wheat. England, no^v^ that she imports wheat, will . ^^-J ^. 
manifestly have to raise from her own soil a diminished ^/^-^ cannot 
quantity of wheat. Her own yield of wheat might be ^^ the case. 
annually diminished by 1,500,000 sacks. The area of her 
soil which is devoted to the growth of wheat will there- 
fore be lessened, and wheat will no longer be grown upon 
that land which is least fertile; or, in other words, the 
least adapted to the growth of wheat. The margin of 
cultivation will therefore ascend, and rents must be reduced. 
The farmer will thus be compensated for the reduction in 
the price of wheat; the landlords will suffer a loss from 
this diminution in the value of their land; the farmers 
may also be temporary losers; some farmers, for instance, 
may be bound by long leases, and rents may not be 
immediately adjusted consistently with the reduction which 
is supposed to have taken place in the price of wheat. 
The home trader therefore may no doubt suffer loss from 
the competition of foreign traders in the same branch of 
industry ; but it must be remembered that everything will 
again be adjusted, because, as has been so frequently re- 
marked, the competition of capital is constantly exerting a 
tendency to smooth down any temporary inequality in the 
profits of different trades. Even if it is admitted that any 
particular class of traders are injured by foreign importa- 
tions, the loss of profit which they thus suffer cannot justly 
be regarded as a confiscation of their private property, 
against which the government is bound to protect them. 
There can be no right to which a nation has a more de- 
fensible, or a juster claim, than that every individual of 
the community should be freely permitted to obtain com- 
modities where he can buy them on the cheapest terms, 
and to sell them where he can realise the highest price. 

The trade between England and France — which, as an Effects of 
illustration, has already been analysed — suggests one or two ^J^^^^l 
other points for consideration, which must be examined in trade uyon 



39^ . Manual of Political Economy, 

BOOK III. order to establish a complete theory of international trade. 
> — Iv — ^ Summarising the hypothetical result at which we have 
the growth arrived, it will be remembered that 100,000 tons of iron 
fountries' ^^^ exported from England, and that in exchange for this 
wJiich im- iron 1,500,000 sacks of wheat are imported into England. 
■port It. j|. ]^^g g^ig^ been supposed that iron has been raised in 
price in England from lOZ. to 121. a ton, in consequence 
of this foreign demand, and hence it has been also con- 
cluded, that since fifteen sacks of wheat are given in 
exchange for one ton of iron, fifteen sacks of wheat will 
be in England of the same value as one ton of iron. 
But if this be so, the price of wheat must manifestly be 
in England 16s. a sack, because the price of iron is con- 
sidered to be 121. a ton. We have assumed that, if there 
was no foreign trade, the price of wheat in England would 
be 805. a sack ; let it also be supposed that the English 
nation annually consumes 6,000,000 sacks of wheat, there- 
fore the English farmers can grow 6,000,000 sacks of 
wheat, and obtain the current rate of profit if the price 
of wheat is .30s. a sack. But if 1,500,000 sacks of wheat 
are imported into England from France, the quantity of 
wheat which will then be required to be grown in England 
will be 4,500,000 sacks instead of 6,000,000 sacks; those 
lands, therefore, will be no longer sown with wheat which 
are least adapted for its growth. 
TJieamount We enunciated, in Chapter III. of this book, the laws 
produced in which regulate the price and value of agricultural produce, 
the country and our readers will remember that the price of wheat is 
mine the determined by the cost of producing it on those soils which 
2orice of are the least fitted for its growth. The price of wheat, 

wheat. . . . . . . . 

therefore, will manifestly decline if the quantity which is 
required to be grown in England is diminished twenty- 
five per cent., and such a decrease as this in the quantity 
required to be grown at home will manifestly result from 
the importations from France. Before these foreign im- 
portations commenced, 30s. a sack was a price adequate 



Foreign Commerce or Liternational Tirade. 391 



to remunerate tliose who grew wheat upon the least book itt. 
fertile soils. The question therefore arises, What will be . ^^-jn. ^ 
the price wliich will adequately remunerate the growers 
of wheat, when the quemtity of wheat required is dimi- 
nished twenty-five per cent. ? 

The terms upon which the foreign commerce between if the price 
England and France is supposed to be conducted imply ^!^^^^'\, . 
that the price of wheat in England would be 16s. a viously is 
sack. But now this important point has to be consi- ^^^^^g^^g 
dered, Will the quantity of wheat which is required by necessary 
England (namely 4,500,000 sacks) be grown if the ^f^^J"^*^^^ 
English farmer can only obtain 16s. a sack for wheat? 
It is manifest that the quantity of wheat required will 
not be produced if 16s. a sack is not a remunerative 
price, for English farmers of course grow wheat for 
j3rofit, and not for philanthropy. The people, however, 
must be supplied with wheat; if therefore 16s. a sack is 
not a sufficient price to induce the English farmers to 
grow the quantity of wheat required, a higher price will 
be willingly offered, rather than that there should be 
any deficiency in the supply. Let it therefore be sup- 
230sed that wheat advances to 205. a sack, and that 
at this price the supply is sufficient to meet the de- 
mand. But let us now consider in what manner the tJie price 
commerce between Engrland and France will be affected '^"^'^ ''^^^' 
by this advance in the price of wheat. At first sight The profits 
it may appear that the profits of those who export iron ^^^1^^^^ 
would be enormously increased by this advance in the not he 
price of wheat ; an iron-master, for instance, if he sells ^f^^^^y 
a ton of iron in England, only obtains 12?. for it, 
whereas by sending it to France he can exchange it for 
fifteen sacks of wheat, which are in England worth 
1dI.\ therefore his profits ajDpear to be increased by 3?. 
upon each ton of iron exported. But the competition of 
capital will, in this as in every other case, render it im- 
possible for the iron-master to continue appropriating to 



392 Manual of Political Economy. 

BOOK in. himself these exceptionally high profits, for each iron- 
N-Ji^ — 1/ master would eagerly strive to send as much iron as pos- 
sible to France if the price obtained for a ton of iron 
exported to France exceeded by 3^. the price realised for 
the iron when sold in England. This anxiety to export 
iron would soon cause the French market to be over sup- 
plied ; iron would therefore fall in price in France, or, in 
other words, iron would exchange for a less quantity of 
wheat. In this way the quantity of wheat given for a ton 
of iron might be reduced from fifteen to twelve sacks of 
wheat. This fall in the price of iron in France will increase 
the demand for iron in that country, and we may consider 
that 120,000 tons of iron are exported to France, whereas 
the annual export of iron had before only amounted to 
hut the 100:000 tons. This increased demand thus excited in 

terms of 

interna- France for English iron will affect its price in the latter 
ttonai trade country, and the price may consequently advance in 
differenthj England from 121. to 13^. a ton. Such are the terms, we 
adjusted, j^^j suppose, upon which the exchange between the two 
countries is ultimately conducted. A ton of iron will 
therefore now be equivalent in value to twelve sacks of 
wheat; but a ton of iron is in England worth 13^., there- 
fore the price of wheat in England will be 2l5. 8d a 
sack. When wheat is at this price a much greater quan- 
tity can be grown in England at a remunerative profit 
than when a sack of wheat sold for 165., and we may 
therefore consider that the wheat now grown in England, 
too-ether with the wheat imported from France, is sufficient 
to supply the English market. From what has been just 
stated it will be perceived that it is necessary, in order to 
adjust the equation of international trade, that the demand 
and the supply should be equalised in both the countries. 
Is the con- It will be remarked, that the price both of the imported 
suTner of _ ^^^ ^^^ exported commodity is affected by foreign com- 

commodities ^ "^ i'i«-riiiii 

invariably merce. We have, for mstance, supposed, it Jingland had 
lenefited hy ^^ foreign commerce, that the price of wheat would be 



Foreign Commerce or International Trade, 393 

305. a sack, and that the price of a ton of iron would be book iir. 
10?. It has been shown that, by foreign commerce, the >^^'7"' - 
price of a sack of wheat may be reduced from 305. to interna- 
2I5. 8c?., and the price of a ton of iron raised from 10?. ^*owa^ 
to 13?. It may therefore be naturally asked, Is it certain 
that the consumer of commodities is benefited by foreign 
commerce ? May not the advantage arising from the 
reduction in the price of the imported commodity be 
entirely nullified by a rise in the price of the exported 
commodity? It can be proved, without entering into 
details, that the wealth of a nation must be increased by 
foreign commerce. Foreign commerce increases the pro- 
ductive powers of labour and capital by causing labour 
and capital in each country to be applied to those par- 
ticular branches of industry for which the country has the 
greatest natural advantages. Thus the wheat imported 
into England would cost very much more, if grown in 
England, than the iron costs with which this wheat is 
purchased from France. Consequently foreign commerce 
increases the productive powers of labour and capital, and 
therefore must augment each nation's wealth. 

It is however no doubt true, that a particular class of It is possi- 
consumers may not be benefited, but, on the other hand, ^^l^Jl^uUr 
may be injured by foreign commerce. If, for instance, class may le 
wheat is imported from France to England, in exchange *"^^^'^ * 
for iron, an increased quantity of wheat must be grown in 
France, and therefore the price of wheat will rise in France; 
the iron which France imports from England will of course 
be reduced in price. But to the great body of the people, 
and certainly to the labouring classes, cheap iron will afford 
no compensation whatever for even a slight rise in the 
price of bread, and thus the labouring classes in a country 
may be injured by foreign commerce, although it augments 
the wealth of a nation. It is quite possible that the 
labouring classes of a particular country may suffer very 
seriously from foreign commerce, if the exports consist of 



394 Manual of Political Economy. 

BOOK in. commodities which are more generally consumed than 
.^^•J^^V . those v/hich are imported. If France exported wheat, 
wine, and live stock, and imported woollen cloths and iron, 
it is very probable that cheaper iron and clothes would not 
adequately compensate the labouring classes in France for 
an advance in the price of meat, bread, and wine. The 
injury which, in this manner, may be inflicted upon the 
labouring classes by foreign commerce, will generally in 
some degree be counteracted by advantages which are not 
connected with the change in the price of commodities. 
Foreign Foreign commerce economises labour and capital, and 

comvierce therefore must exert some tendency towards increasing the 
raisewages. nommal wages 01 the labourer, tor when labour and capital 
are economised, an equal amount of material wealth can be 
produced by the application of a diminished quantity of 
labour and capital. But if this be so, the labourer's 
wages will be increased without encroaching upon his 
employer's profits; in fact, since more wealth is produced, 
there will be a larger aggregate amount to be divided 
between the employer and the employed, and consequently 
the profits, as well as wages, may be augmented. 
A ithough We h ave been the more anxious to point out the loss which 
this loss to foreign commerce may inflict upon those who consume the 
mmer may exported commodity, although the loss is one which is doubt- 
iake place, \q^^ generally more than made up for in practice by counter- 
balancing advantages, because it is too much the custom to 
think only of the interest of the trader or merchant, and 
entirely to forget the consumer. Many of our statesmen 
consider that the nation must be advancing in prosperity 
and happiness if the Board of Trade Keturns exhibit an 
augmentation in the exports and imports. But on behalf 
of the consumer it should be borne in mind, that a rise in 
the price of the commodities exported is not unfrequently 
a prominent feature of an expanding foreign trade. Al- 
though this, as a possible result of foreign trade, is one 
which ought not to be lost sight of, yet w^e should be the 



Foreign Commerce or International Trade. 395 

last to advocate that commercial intercourse between book hi. 
countries should be impeded, because commodities may . ^"- J"- . 
rise in price in the country from which they are exported, restrictions 
A policy which should attempt such restrictions would not ^^ trade 
only be unwise, but ought almost to be stigmatised as tic and 
wicked. Man, we conceive, has an indefeasible right unjust. 
that the wealth which ministers to his wants, and provides 
his enjoyments, should be produced with as little labour 
as possible. This can only be secured by perfectly free 
commercial intercourse between all nations. The benefits 
conferred by foreign commerce are truly cosmopolitan; it 
brings men of every nation in contact, and thus becomes 
the most powerful agent of civilisation. Foreign commerce 
removes the barriers between nations, and makes them one, 
as far as their industrial economy is concerned. A ran- 
corous enmity, combined with an ignorance of the true 
principles of trade, has for centuries opposed every possible 
obstacle to a trade between France and England. Many 
of our manufactured commodities were far superior to 
those possessed by the French, and they, on the other hand, • 
had products which could not be grown on our own soil, 
and under our climate. If the Straits of Dover were 
bridged over by a narrow strip of land, and the two coun- 
tries formed one nation, it would seem inexpressibly absurd 
that those who lived in the north of the country should 
scarcely be permitted to taste the products which are grown 
in the south; and it would seem equally absurd, that people 
in one part of the country should be compelled to manu- 
facture certain commodities, under the most unfavourable 
conditions, because they were not permitted to purchase 
these commodities in another part of the country, although 
there the quality would be better, and the price cheaper. 
A restrictive policy which seems so unreasonable if two 
nations become one, is not more defensible when the two 
nations are separated by a boundary which is often merely 
artificial. 



39^ Manual of Political Econom-y, 

It now becomes necessary, in order to complete the 
theory of international trade, no longer to omit from our 
The cost of consideration the cost of carrying from one country to 
carrixige another the commodities which are interchanged. The 

must oe , _ ^ o 

talcen into subject will be best explained by our former example. Let 
account. -^^ ^^ assumed that the cost of exporting iron from the 
English to the French markets is 1^. per ton, and that the 
cost of exporting wheat from the French to the English 
market is 2s. a sack ; the question therefore at once 
suggests itself, What share of this cost of carriage is borne 
by each country respectively? Let the terms of exchange 
be one ton of iron for twelve sacks of v/heat ; the iron in 
England being raised in price from li)l. to 13^. a ton, in 
consequence of the foreign demand. We will first ex- 
amine what will take place if the cost of carriage were borne 
entirely by the exporter; the English merchants paying 
the whole expense of sending the iron to France, and the 
French merchants papng the whole expense of sending 
wheat to England. Upon this hypothesis, although Eng- 
• land would nominally sell her iron to France at 13^. a 
ton, yet the real price would be only 12/., because 11. per 
ton has to be deducted for cost of carriage ; similarly 25. a 
sack would have to be deducted from the nominal price 
which the French obtain for the wheat sent to England. 
If, therefore, France gave England 13/. a ton for iron, iron 
must be selling in the English market for 12/. a ton; if 
it sold for more, it would be manifestly to the advantage 
of the English merchant to dispose of his iron at home, 
instead of exporting it to France ; and for the same reason 
wheat must be selling in the French market at 25. a sack 
less than the price at which England purchases it from 
France, in order to compensate the French exporter of 
wheat for the cost of carriage. Each country will therefore 
have to pay a higher price for the commodities they im- 
port, in consequence of the cost of carriage, and therefore 
the demand for the imported commodity will not be so 



Foreign Commerce or International Trade. 397 

great as it would be if no expense were involved in carry- book til 
ing goods from one country to another. There will there- > — ^JLly 
fore be a diminution in the French demand for English The de- 
iron, and in the Eno-lish demand for French wheat. But ''^^''^^ *^ 

. "^ . . , eaclh court- 

the falling off in the demand may vary in different ratios try will he 
in the two countries. Thus a rise of 2-§. in the price q^ <^J^^<^^!^^M^t 

J- tn, different 

French wheat may diminish the demand for French wheat ratios. 

in England by one-fifth, v/hereas a rise of 11. a ton in the 
price of iron may cause only a decrease of one-tenth in 
the quantity of iron purchased by France from England. 
Our previous analysis has shown that the terms upon which 
commodities are exchanged, in international trade, are 
entirely regulated by the demand. Each country purchases 
the imported commodities by those which are exported, 
and the amount of the demand which a country has for 
any commodity depends upon its price; if, therefore, a 
country wishes another to purchase a greater quantity of 
her exports, the price of these exports must be reduced ; 
consequently, when the bargain of international trade is 
finally settled, the price of imported and exported com- 
modities must be such that each country is enabled, by 
means of her exports, to pay for all the commodities which 
are imported. 

If the cost of carriage should raise the price of the com- Tlie sTiare 
modities interchanged in foreign commerce, the amount carriage 
of this increased cost, which is borne by each of the coun- home hy 
tries respectively between whom the trade is carried on, ^^ench%on 
depends upon the relative degree in which the demand for this ratio. 
imported commodities is affected. Thus we have supposed 
that the cost of carriage diminishes the demand for French 
wheat in England by one-fifth ; whereas the same cause 
only diminishes the demand for English iron in France by 
one-tenth. We will illustrate this by a numerical ex- 
ample. 

Suppose that 100,000 tons of iron would be each year Avalys^h of 
exported from England to France, if commodities could ^^^^ ^^^^^ 



,95 



Manual of Political Economy, 



'produced 
in a par- 
ticular 
case. 



BOOK III. be sent from one country to another without any cost of 
— 1, ' > carriage, and that, under the same supposition, France 
would export to England 1,500,000 sacks of wheat in 
exchange for the iron. Let it also be.assumed that English 
iron would sell for 15?. a ton in France if there was no 
cost of carriage; the cost of carriage, being 1?. a ton, will 
raise the price of English iron in the French market to 
IQl. a ton. Similarly it may be assumed that cost of 
carriage raises the price of French wheat in the English 
market from 20s. to 225. a sack. If English iron was sold 
to France at 15?. a ton, and if French wheat was sold to 
England at 205. a sack, France would import 100,000 tons 
of iron, and England would import 1,500,000 sacks of 
wheat; the equation of international trade would conse- 
quently be satisfied, because the exports from each country 
would be exactly equivalent in value to the imports. But 
the rise in the price of English iron to 16?. a ton di- 
minishes the demand of France by one-tenth, and the 
demand of England for French wheat is diminished by 
one-fifth^ if its price rises to 225. a sack. Although, there- 
fore, the French will only purchase 90,000 tons of iron at 
16?. a ton, yet they may be willing to increase their pur- 
chases by 5,000 tons, if iron is reduced in price 5s. a ton. 
The English iron-masters must submit to this reduction 
in price, because the demand for iron in France has been 
diminished by the cost of carriage, and the supply will 
consequently exceed the demand if the price of iron 
remains at 16?. a ton. The French exporters of wheat 
must submit to a still greater reduction in price, in order 
to equalise the demand to the supply, because the demand 
of England for French wheat, when its price is raised, is 
more affected than is the case with the demand of France 
for English iron, when its price is raised. French wheat, 
therefore, may sell in England for 2l5. instead of 225. a 
sack ; if this be so, the French growers of wheat will only 
obtain 195. a sack for the wheat which they export to Eng- 



Foreign Commerce or International Trade, 399 

land, because there must be sufficient difference between book iir. 
the price of wheat in France and England to cover the < — 1^ — ^ 
cost of carriage, which is 25. a sack. In a similar way the 
English iron-masters will only obtain 14Z. 15^. a ton for 
the iron ^vhich they export to France, if iron is sold in the 
French market at 151. 16s. a ton, because there must be 
such a difference between the price of iron in the French 
and English markets to cover the cost of carriage, which 
we have assumed to be 11. a ton. The hypothesis which 
has been made consequently leads to the following results. 

If there was no cost of carriage, iron would be selling Besnlts ar^ 
in the En owlish and French markets at 15/. a ton. The cost ?^'^^ f/. 

, ° . . from f/as 

of carnage, wdiich is supposed to be 11. a, ton, raises the analysis. 
price of iron in France to 151. los. a ton, or, in other 
words, increases the price of iron by 155. a ton. It would 
therefore appear, that France pays seventy-five per cent, of 
the cost which is involved in sending iron from England 
to France. 

Again, if there was no cost of carriage, French wheat 
would be selling in England and France at 20s. a sack ; 
the cost of carriage, which is supposed to be 2s. a sack, 
raises the price of French wheat in England to 21s. a sack ; 
the cost of carriage, therefore, although amounting to 2^. 
a sack, only raises the price of wheat Is. a sack in England. 
It would therefore appear that England only pays fifty 
per cent, of the cost which is involved in sending wheat 
from France to England. 

These results consequently lead to the conclusion that General 
France contributes more to the cost of carriage thEni ^^^''^^/jj'^ 
England, or, in other words, that as far as international effect pro- 
trade is concerned, the latter country is placed in a any new 
better position, as regards the cost of carriage, than is the dement 
former country. This conclusion still further corroborates ofcarriaac. 
the following principle — If any new element, such as cost 
of carriage, should affect the terms upon which the trade 
between the two countries is conducted, the re-adjustment 



40Q Manual of Political Economy. 

of the bargain will most turn to the advantage of that 
country whose demand for the imported commodities is 
either most diminished or least increased by the new 
conditions of which account has to be taken. 
The as- It has been assumed, in the remarks which have just 

sumption -^QQQ-^ made, that the difference in the price of any com- 
thatthe modity, in two countries between which there is free 
differenceof commercial intercourse, cannot exceed the cost of sendino^ 
any com- a commodity from one country to the other. Although 
Twocoun- ^^^^ proposition appears to us to be a self-evident truth, 
tries cannot yet it may be perhaps advisable to say a few words upon 
Tolfof ^ '^^' -^^^ ^^^ take, as an example, the one we have above 
carriage analysed. It has been there assumed that the cost of 
\!,^^ sending iron to France is 11. a ton, and the cost of sending 

wheat from France to England is 2s. a sack. If there 
was no cost of carriage, the price of iron and wheat must 
be the same in England as in France, because if iron 
would realise even as little as 2^. Qd. a ton more in France 
than in England the English iron-masters vfould vie with 
each other to sell as much of their iron as possible in 
France, in order to secure the extra 2^. 6d a ton, and 
eager competition would rapidly reduce the price of iron 
in the two countries to an equality. It will be remembered 
that it has been also assumed, in our exam^ple, that if 
there were no cost of carriage English iron would sell in 
each country for 161. a ton, and French wheat would sell 
in each country for 205. a sack. These prices would adjust 
the equation of international trade, enabling the exports 
of each country exactly to pay for the imports. Again, it 
has been assumed that, when the cost of carriage is taken 
into consideration, English iron must sell for 15^. 15 s. a 
ton in France, and French wheat must sell in England for 
2l5. a sack, in order that the equation of international 
trade may be satisfied. The question now suggests itself, 
"What, under these circumstances, will be the price of 
English iron in England, and what wiU be the price of 



Foreign Commerce or International Trade, 401 

French wheat in France. We answer, at once, that the book nr. 
price of iron in England will be 14^. 156'. a ton, and that J^I!L^ 
the price of wheat in France would be 195. a sack. This 
we maintain must be the case, for since the cost of sendino" 
iron from England to France is supposed to be 1^. a ton, 
the difference in the price of iron in the two countries 
must be 1^. a ton. For if the difference was less than 
this, and the price of iron was 15^. a ton in England, no 
iron-masters would send any iron to France, as it would, 
be so much more remunerative to sell it in England. 

Again, there cannot be a greater difference in the price The d!f. 
of iron in the two countries than 1/. a ton, for if iron was -f^^y^^^ ^f 
Im. IO5. a ton m France, and 15^. m England, the English exactly 
iron-masters would vie with each other to sell all their ^5^f ^ j^ 

cost of 

iron in France, because their iron, after paying the cost of carriage. 
carriage, would realise 10s. a ton more in France than 
in England. These considerations establish the proposi- 
tion that the difference in the price of any commodity, in 
two countries, is exactly equivalent to the cost of sending 
this commodity from the one country to the other. 

It may be objected that prices in different countries r/iese re- 
cannot be compared, because countries have seldom the ^^*^^^ "^ 
same currency. Without anticipating the remarks we hy the ch'f- 
shall make, in a future chapter, on currency, it will be /^^^^^^ 0/ 
sufficient to state here that the price of a commodity in two coun- 
different countries can always be compared by considering ^'''^^^' 
how much gold it will exchange for. The distinctive 
characteristic of a substance like gold is, that it is a uni- 
versal medium of exchange ; people in France are as ready 
to sell their commodities for gold as we are in England. 
The cost of sending an ounce of gold to France is most 
trifling, and therefore, if an ounce of gold would purchase 
a greater quantity of wheat in France, including the cost 
of sending the wheat from France to England, than could 
be purchased by the same quantity of gold in England, 
gold will be exported to France for the purpose of pur- 

DD 



402 . Manual of Political Economy, 

chasing wlieat. The demand for wheat would therefore 
rise in France, and its price would increase. Similarly, if 
the English consumers of wheat purchased wheat from 
the French instead of the English growers, the demand for 
wheat in England would decline, and this rise in the price 
of French Avheat, and this fall in the price of English wheat, 
would continue until at length there ceased to be any 
profit in sending gold from England to purchase wheat in 
France. Such a profit would manifestly cease to exist if 
there was no greater difference in the value of wheat in 
the two countries, estimated in gold, than would be equi- 
valent to the cost of carriage. But we have defined the 
price of a commodity to be its value estimated in gold. 
It may be therefore said that, if the trade between two 
countries is perfectly free, there cannot permanently be 
any greater difference in the price of any commodity in 
. the two countries than would be equivalent to the cost 
of carrying the commodity from the one country to the 
other. 
TJiesetrutTis Throughout this chapter, the assumption has been 
may be ex- j^iade that foreign commerce has been restricted to two 

tended to . ° • • i i • i 

trade Countries, and to two commodities, ihe principles which 
Mween any y^^^q been deduced from this assumption enable us to 

number of -^ . 

countries in establish a Complete theory of international trade. For 
any number ^^^ ^^ ^^^^ ^-^^ international trade of a country like Eng- 

of articles. . "^ ° 

land, as it is really carried on, and consider how the 
bargains of foreign commerce are adjusted, when England 
exports the most varied commodities to every country in 
the world, and imports in exchange every product which 
can either gratify the desires, or minister to the wants of 
the people. In this case it is equally true that there is an 
equation of international trade which must be satisfied, and 
it is easy to show, by a method of investigation similar t 
that pursued when corn was supposed to be exchanged for 
iron, that the aggregate exports must pay for the aggregate 
imports. The terms upon which this exchange is con- 



Foreign Commerce or International Trade, 403 

ducted are regulated entirely by the relative amount of the book m. 
demand which exists in two trading countries for the ^^^l^Hi^ 
various commodities which each country respectively im- 
ports. We have already shown that England must give 
France a greater quantity of iron for the same amount of 
wheat, or, in other words, the terms of the exchange will 
turn to the advantage of France, and to the disadvantage 
of England. If England's demand for French wheat 
increases in a greater ratio than the demand of France for 
English iron, in a similar way the bargain of foreign trade 
will become less favourable to England, or, in other words, 
England will be compelled to receive less for her exports, 
and to give more for her imports, if her demand for the 
various commodities which she imports increases in a 
greater ratio than the demand which countries may have 
for the various commodities which compose her aggregate 
exports. 

We have now investigated in sufficient detail the prin- 
ciples of international trade. We proceed to apply these 
princij)les to a very important case, for in the next chapter 
we shall investigate the laws which determine the value of 
money, when the precious metals of which money is com- 
posed are considered as commodities exported and imported 
as ordinary commodities of commerce. 



DD2 



404 



CHAPTER VIII. 

ON THE TRANSMISSION OF THE PRECIOUS METALS FROM 
ONE COUNTRY TO ANOTHER. 

BOOK III. jj^ ACH country obtains its supply of the precious metals 
cH. VIII. Pj i^ "t^yo distinct ways. In the first place, gold and silver 
Gold may ^^® imported from the mining countries as an ordinary 
he trans- commodity of commerce, and secondty, the precious metals, 
^either as an'^"^ the form of money*, are sent from one country to 
article of another for various purposes. For instance, loans are 
commerce ^.^^g^^ ^^ England for India, and these loans are in a great 
'money. part transmitted to that country either in bullion or in 
specie. England annually purchases from China an 
enormoas amount of tea and silk, and China prefers to be 
paid for this tea and silk by the precious metals rather 
than by our manufactured goods. Formerly a great portion 
of the rent of the land in Ireland was paid in money to 
absentee landlords. Capital may be invested in our funds 
and railways by foreigners, whose dividends will be annu- 
ally paid to them in money. Again, with regard to inter- 
national trade, it must be remembered that commodities 
are not always exchanged by barter, but are almost always 
bought and sold for money. English merchants who 
purchase wheat from France pay for it in money, instead 
of offering other commodities, such as iron and coal, in 

* We shall, in this chapter, speak of the precious metals and money as 
synonymous expressions. This we are justified in doing, because it has been 
previously shown that the value of gold and silver when in bullion must be 
the same as when coined into money. If an ounce of gold could be coined 
into four pounds sterling, the value of the ounce of gold must be il. 



Ti^ansmission of the Precious Metals, 405 

exchange for this wheat. These, and many other circum- book m. 
stances which mis^ht be enumerated, cause a considerable v.^flli[^ 
amount of the precious metals to be constantly passing, 
either in the form of money or bullion, from one country 
to another. We will, in the first place, restrict our attention 
to the exportation of the precious metals from the countries 
whence they are obtained. 

A considerable portion of the industry of Australia and Gold forms 
California is devoted to gold-digging, and gold is, to these ortJj,^^.^ '^ 
countries, as truly a staple article of export as hardware or exports of 
cotton cloth are with regard to our own country. ^QTrielZnd' 
may, therefore, consider the precious metals as an ordinary «'<s value is 
article of export or import, and the value of these metals ^^ TheTame 
is consequently regulated by the same laws as those which principles 
determine the value of any other commodity which is ^other'lom- 
bought and sold in the transactions of foreign trade. For modities. 
instance, Australia, like any other country, must pay for 
the commodities she imports by those which she exports. 
It makes no difference whatever that a principal part of 
Australia's exports happens to be gold. It may in fact be 
shown, that the discovery of rich gold mines in Australia 
exerts on the industry of that country an influence similar 
to that which would be produced by the discovery of rich 
deposits of some material which Englands exports ; such, 
for instance, as iron. If the discovery of very rich deposits 
of iron-stone caused a great increase in the quantity of iron 
annually produced in England, iron would inevitably 
decline in price. This decline in 'price would increase the 
home demand for iron, and the foreign demand would 
also be increased, because iron would be offered to foreign 
countries at lower rates. An equality between the demand 
and the supply would in this manner again be restored, 
and the whole of the increased quantity of iron produced 
would be quickly absorbed. 

We may, in a similar way, trace the results which would A great 
ensue if there should be a great increase in the yield of ^^^^^^^^^ ^^ 



40 6 Manual of Political Econo^ny. 

BOOS III. gold in Australia, or in the yield of silver in Mexico and 
— l-v — '- Peru. At the present time the annual produce of gold in 
iAe profZwc- Australia is about 2,500,000 ounces. Suppose that, from 
tionofgold^Q discovery of rich deposits, or from improvements in 
quartz-crushing, Australia annually yielded 5,000,000 
ounces of gold, instead of 2,500,000 ounces. How would 
this increased quantity of the precious metals be absorbed ? 
We have seen that additional supplies of iron would be 
absorbed by a decline in its value increasing the demand 
for it. Let us now enquire if an additional supply of gold 
will not be absorbed in a similar way. 
would he _ It is quite evident that Australia would not require this 
^thelamt additional 2,500,000 ounces of gold for her own use. She 
way as a -^[W therefore export the gold to other countries, but in 
%ease7n what form, and for what purpose, will this gold be ex- 
theproduc- ported ? In the first place, Australia, having become so 
irm. much wealthier, would more largely purchase foreign 

commodities. Every article of luxury or utility which 
Australia had been previously accustomed to obtain from 
foreign countries, she would now purchase in larger 
quantities. The consequence of this would inevitably be, 
that these commodities would advance in price, on account 
of the increased demand. Suppose the exports from 
England to Australia were doubled, this increased demand 
w^ould cause the price of the articles which compose these 
exports to rise in England, as well as in Australia. The 
value of gold, estimated in these commodities, would there- 
fore decline, and thus a tendency is exerted, just in the 
same way as in the case of the iron, to cause the increased 
yield of gold to be absorbed, in consequence of a decline 
in its value. 
Gold is also Having now considered the case in which the precious 
transmitted j^^tals are Sent from the miniDg countries as a staple 

m the jorm ^ . , . . 

of money commodity of commerce, we will proceed to investigate the 
second of the two modes by which the precious metals are 
distributed over the world. We have, at the commence-- 






Transmission of the Precious Metals. 407 

ment of this chapter, enumerated some of the various pur- book hi. 
poses for which gold and silver are transmitted from one ^^^l^^ 
country to another in the form of money. The reason oifortkepay- 
this constant transmission is, that ffold and silver contain *^'^,^^ ^f 

. debts 

great value in a small bulk, and therefore can be sent from 
one country to another at little cost. The precious metals, 
moreover, are willingly accepted in exchange for goods 
purchased by every trading community in the world. 
Each year we purchase an enormous quantity of tea and 
silk from China. The Chinese are not very willing to 
accept any of our manufactured goods in exchange, but 
they seem eager to sell us as much tea and silk as we 
choose to take, if we will only pay them for it by gold 
and silver. Many of the commodities which we import 
from India are paid for by money; vast sums of specie 
are also sent from England to India, to pay the various 
officers of our government, both civil and military, and 
also to pay the wages of those engaged upon the railways, 
and other public works which are in the course of being 
constructed, principally by English capital. In fact, so 
various are the purposes for which England is obliged to 
send the precious metals to the East, either in the form of 
bullion or specie, that the annual export of the- precious 
metals from this country to India an-d China has, m. some 
years, amounted to at least 12,000,000^. 

The precious metals are also transmitted from one or for in- 
country to another, for the purpose of investment. If, ^'^sfmen^. 
according to our former example, the yield of gold in 
Australia should be doubled, it would be reasonable to^ con- 
clude, that the whole of this increased gold would not be 
entirely absorbed by the expanding trade, both home and 
foreign, which would no doubt be stimulated by sucIl an 
increased production of wealth. Many of those who 
possessed the gold would send a portion of it to England 
and other countries, to be invested in various securities, 
such as funds, railway shares, &c. Statistical returns 



4o8 Manual of Political Economy. 

BOOK III. prove that this is the course pursued. Almost the entire 

> — ly. ..'> gold which Australia annually yields is sent to England. 

A portion of this, but probably only a very small portion, 

pays for the commodities which England exports to 

Austraha; a great part of the remainder is invested in our 

funds, in railway shares, bank shares, and various other 

securities, which are bought and sold in our money market. 

The precious metals which are thus poured into England 

she again redistributes, each year sending, as we have just 

remarked, no less a sum than 12,000,000l sterling to India 

and China. 

The quan- In our remarks on price, we have shown that the general 

money in P^i^es which prevail in a country are regulated by the 

circulation extent of the country's commerce, and by the amount of 

arease as ^^^ precious metals which exist in the country in the form 

commerce ^ of money. It may, in general terms, be stated, that if 

increases in .-, , ,. , 1,1^ , • 

order that ^he population and wealth 01 a country increase, prices 
prices may ^iH decline, unless a greater amount of money is brought 
tuate. i^to circulation. On the other hand, prices will rise if a 
greater amount of money is brought into circulation, when 
there is neither an expansion of commerce nor an increased 
production of wealth. It is most undesirable that there 
should be any great fluctuations in general prices; it is 
true, however, that popular feeling is not unfrequently 
opposed to this idea, for there are many who still think 
that general high prices are advantageous to the producers 
of commodities, and that a general decline in prices would 
benefit those who purchased the commodities. A general 
rise or fall in prices means that the standard of value is 
altered ; if there is a general rise in prices to the extent of 
one hundred per cent., two sovereigns will be only worth 
as much as one sovereign was worth before; the country 
would not be richer; the only result would be, that the 
terms of every money contract would be altered. Those 
who had fixed money payments to make would only have 
to give half as much value as before, and all whose incomes 



Transmission of the Precious Metals. 409 

were derived from such investments as funds, guaranteed 
stocks, &c., would have their real incomes diminished one 
half, for 300/^. a year would now be worth no more than 150^. 
a year was worth previously. Such consequences would 
not only be disastrous to individuals, but would also, if of 
frequent occurrence, give to all monetary transactions an 
uncertainty which would act most prejudicially upon the 
interests of commerce. It is therefore of great importance 
that general prices, or, in other words, the value of gold, 
should -fluctuate as little as possible. General prices are, 
as we have stated, regulated by the quantity of money in 
circulation, compared with the amount of the nation's 
wealth and commerce; hence, in order to prevent a fluctu- 
ation in the general prices which prevail in a country, the 
quantity of money in circulation ought to increase or 
decrease as the commerce of the country increases or 
decreases. 

It may appear that such an adjustment can have little Method of 
chance of being made in England, because she receives ^jl^-^ckTemls 
gold from so many sources, and again sends it to other to keep 
countries for so many various purposes. But, in spite of ^^^tiii^' 
this apparent complexity, there is an agency constantly at England. 
work to regulate the quantity of money in circulation, so 
that the value of gold exhibits great steadiness, and, except 
within certain small limits, is subject to few fluctuations. 
The mode in which this agency acts may be explained in 
the following manner. Suppose that the quantity of gold 
which England should import from the gold-producing coun- 
tries during the next year were to exceed by 4,000,000^. the 
amount which she imports during the present year; but 
that in every other respect there should be no difference with 
regard to her commerce, either home or foreign, between 
the next year and the present one. This extra 4,000,000Z. 
of gold, we may further suppose, is sent to the Bank of 
England, and there coined. It might, therefore, appear 
that an additional 4,000,000^. of money is brought into 



41^0 Manual of Political Economy, 

circulation, and that, in consequence of this increased 
specie circulation, general prices would inevitably rise. 
But this rise in general prices could not long continue; a 
force would be brought into operation which would exert 
a tendency to restore prices to the point at which they 
previously stood. For if such a general rise in price should 
occur in England during the next year, and no similar rise 
should take place in other countries, it would mani- 
festly be to the interest of England to purchase such com- 
modities as wheat from foreign countries, in order to 
avoid the higher prices which are supposed to prevail in 
England. Foreign merchants would also be anxious to 
participate in the high prices which are current in England, 
and would therefore increase, as far as possible, the quantity 
of goods which they export to England. Both of these 
causes would act in the same direction, and would alike 
exert an influence to increase England's imports and to 
diminish her exports. The equation of international trade 
would therefore be disturbed, a large amount of money 
would be sent abroad to pay for these increased imports; 
in this manner the gold which we have supposed was 
temporarily added to England's circulation would be 
rapidly withdrawn. The extra 4,000,000^. of gold would 
not be added to England's specie circulation, but would 
be gradually distributed over every trading country. 

We have now described the various modes in which the 
precious metals are transmitted from one country to 
another; we shall devote a special chapter to the consi- 
deration of the leading effects which have been produced 
by the remarkable gold discoveries which have been made 
during the last few years. No question in the whole 
range of economic science has, at the present time, more 
important bearings. 



411 



CHAPTER IX. 

FOREIGN EXCHANGES. 



IT was remarked in the last chapter that, in foreign com- book m. 
merce, commodities are seldom exchanged by barter; . ^^ - J^- . 
each country usually purchases its imports by money, and Methods hy 
sells its exports for money. If we export coal to France and ^'^^'^^^ j^- 
import silk from that country, we do not barter a cargo of ^^^^^ ^^^^^z 
coal for so many bales of silk, but the coal is sold for money ^^ settled. 
and the silk is purchased by money. Let us suppose that A, 
an English merchant, sells a cargo of coal to B, a French 
merchant, for 1000^., and that C, another English merchant, 
purchases from D, a French merchant, a certain number 
of bales of silk for lOOOZ* It is manifest that there 
are two distinct ways in which such trading transactions 
as these we have just mentioned may be settled. In the 
first place, B may pay for the coal he purchases by sending 
to A 1000^. from France to England, and in a similar 
way C may pay for the silk which he purchases by sending 
to D 1000^. from England to France. It is evident that, 
if this plan were adopted, the risk and expense would be 
incurred of sending 1000^. from France to England, and 
also of sending lOOOZ. from England to France. 

A second very obvious course might be adopted, which 
would avoid the necessity of transmitting any money from 
one country to the other, and consequently the expense to 
which we have just alluded would be saved. If C were 

• The currencies of France and England are, in the first instance, sup- 
posed to be identical. 



exchange. 



412 Manual of Political Economy » 

instructed to pay the Englisli mercliaiit A lOOOZ., instead 
of paying the same amount to D, who lives in France, and 
if the French merchant B was also instructed to pay D 
1000^.; instead of sending this amount to A in England, 
the debts due to A and I) for the coal and silk they have 
respectively sold would be completely discharged without 
the transfer of any money from the one country to the 
other. The course we have just described is that which 
is almost invariably adopted in the transactions of foreign 

Bills of commerce, and bills of exchange are the means by which 
the method is carried into practical effect. It is only neces- 
sary to explain the nature of bills of exchange, in order to 
show the admirable machinery they provide for arrang- 
ing the bargains of foreign commerce, by the transmission 
of the smallest possible amount of specie from one country 
to another. 

Their In the above example, where A sells B a cargo of coal 

for 1000^., A receives from B a bill of exchange, and this 
bill is simply a written acknowledgement that B owes A 
1000?., and that this amount will be paid at the date for 
which the bill is drawn, if it is presented either at B's own 
banker's, or at any other establishment which has confidence 
in B's solvency. In a similar manner the French mer- 
chant D, who sells 1000?. worth of silk to the English 
merchant C, receives from C a bill of exchange . for this 
amount. The English merchant A has therefore in his 
possession a bill for lOOOZ., which has to be paid in France, 
and D, the French merchant, has also a bill for 1000?., 
which is to be paid in England; if A and D exchange 
these bills, then A has a bill which will be paid in England, 
and D has a bill which will be paid in France, and 
therefore both A and D's debt can be discharged without 
the transmission of any specie whatever from one country 
to the other. The exchange which we have here supposed 
to take place between A and D is not usually effected 
directly by merchants themselves ; such transactions form a 



nature. 



Foreign Exchanges, 413 

distinct business, which is carried on by a class of middle book m. 
men, who are termed money dealers or bill discounters*. - ^^'J ^^l^- 
The English merchant A, instead of waiting to exchange if the value 
his bill with the French merchant D, at once takes it to ^f ^m^orts 
an English discount house, who readily cash it for him, A are equal, ^ 
paving a small sum for commission ; D in a similar ^^^f^^- 

, 1 • 1 -n TIT 1 • • T mission of 

manner gets his bill cashed by takmg it to a discount specie is 
house in France ; in this wav the English discount houses «^<^^^^«^ ^?/ 
collect all the bills which are drawn upon France, and the bills of 
French discount houses collect all the bills which are drawn '^^^^'■'^"-y^- 
upon England. The French and English discount houses 
then exchange the bills thus gathered together, and are 
remunerated for the trouble which they thus take, by 
the small commission which is paid to them. If, there- 
fore, the value of the exports sold to France is exactly 
equal to the value of the imports which are bought 
from that country, the whole of the trade between 
the two countries can be carried on without the transmis- 
sion of any specie ; in fact the transmission of specie 
can be as completely avoided as if the whole trade 
was one of barter, and coal and iron were bartered away 
for silk and wine. 

It will, however, very rarely happen that the money |/«^«^««<'e 
value of the exports which are sold to any particular ^^^^,"^ici^?o 
country is exactly equal to the money value of the imports France, 
which are bought from the same country. Suppose thatg^^AaToe 
the annual value of England's exports to France was o»^ France 
10,000,000^., and that the annual value of the imports 
from that country vv^as 12,000,000^. Under these circum- 
stances it is manifest that the bills which are in the 
possession of French merchants, and which are drawn in 

* Popular prejudice attaches to a bill di'^couuter a certain opprobrium, 
for it is not unfrequently supposed that he is a person who lends money at 
usurious rates of interest. It is hardly necessary to state that we do not 
share this pcejadice; for we conceive that no business is more legitimate 
or more useful than that which is carried on by the discount houses in a 
commercial country. 



414 Manual of Political Economy. 

BOOK HI. England, will exceed in amount by 2,000,000Z. the bills 
. ^H. ^ ix. ^ ^Jiich are drawn upon France, and which are in the 
a premium possession of English merchants. It is, of course, to the 
about equi- interest of the English merchant to pay the French 
the cost of merchant by bills drawn upon France, because by doing 
transmit-^ SO the English merchant saves the expense of sending 
specie to France, and the French merchants who have 
bought the goods we export are for similar reasons 
anxious to pay the English merchants by bills drawn upon 
England. But since the value of England's imports from 
France exceeds the value of her exports to that country, 
England will have to pay to France a larger sum than 
France has to pay England, and therefore the demand 
which exists in England for bills drawn on France will 
exceed by 2,000,000^. the demand which exists in France 
for bills drawn on England. In fact, English merchants 
have to pay in France 12,000,000^., and there are only 
10,000,000^. of French bills wherewith to make the pay- 
ment; some of the English merchants, therefore, will be 
obliged to transmit specie to the amount of 2,000,000^., 
and those who do transmit this specie must incur the 
expense of the transmission. If this expense were two 
per cent., it would, of course, be to the advantage of the 
English merchants to purchase bills in France, even if 
they paid one and a half per cent, premium for them ; for 
if bills were bought at this premium it would be cheaper 
by one half per cent, to make payments to France by 
means of these bills, instead of transmitting specie, which, 
as we have supposed, involves an expense of two per 
cent. English merchants, therefore, will compete for the 
purchase of bills drawn on France, and this competition 
will inevitably raise these bills to a premiiun which is 
approximately equivalent to the expense of transmitting 
specie to France. The premium upon bills cannot exceed 
this amount, because if it did so then it would be cheaper 
to transmit specie than bills. 



Foreign Exchanges, 415 

Similar considerations will show that, in France, bills book hi. 
which are drawn on England will be at a corresponding ^ ^^•^^-^- , 
discount. French merchants have to receive 2,000,000^. Biih on 
more for goods exported to England than they have to Ewjland 
pay for goods imported from that country. In France correspond- 
there will be 12,000,000^. of bills drawn on England m'^^^dis. 

^ count. 

possession of French merchants, and since France has only 

to pay England 10,000,000^., there will be a demand for 
only this amount of bills drawn on England. 2,000,000?. 
of the bills drawn on England must therefore be sent to 
England to be cashed, and the money will then have to be 
transmitted to France. But if a bill drawn on England 
is not wanted in France to pay for goods bought in 
England, such bills must, of course, fall to a discount. A 
money dealer obviously cannot afford to give a merchant 
more than 98?. for a bill on England for 100?. if it is 
necessary to send this bill to England to be cashed, and 
have the money transmitted to France, since it has been 
assumed that such transmission costs two per cent, of the 
specie transmitted. When, therefore, bills drawn upon 
France are at a premium irlt England, bills drawn on 
England will be at a corresponding discount in France. 
When the state of things which we have here described 
exists, it is technically said that the exchange is against 
England and in favour of France. 

The origin of this phraseology may be readily explained. The mean- 
It is evident, from our remarks above, that the exchange J'^f,-^ ^/^„y 
is against England, and in favour of France, when the in this case 
commerce between the two countries is such that it is ^agaimt'^ ^^ 
necessary to send specie from England to France. At one England, 
time, as we have previously stated, the belief was universal, ^avovl- of 
and is still very general, that the profit which a nation France. 
derives from foreign commerce could be accurately esti- 
mated by the amount of specie which she succeeded in 
drawing to herself from other countries. This belief formed 
the basis of the Mercantile System, and the statesmen 



41 6 Manual of Political Eco7iomy, 

of every commercial nation have, in years gone by, vied 
with each other to frame ingenious devices which should, 
as far as possible, encourage the importation of the 
precious metals, and should impede their export. It is no 
wonder, then, that the exchange is described as being 
against a country, when its foreign trade is in such a 
position as inevitably to require the transmission of specie 
to foreign countries. 
The mean- "We have now sufficiently analysed the meaning of those 
Thange^'t expressions which are so constantly used in every-day life, 
par, namely, that the exchange is against, or in favour of a 

country. The exchange will, of course, be at par when 
the value of the exports to a country exactly equals the 
value of the imports from the same country. If we had 
supposed, in the above example, that the value of Eng- 
land's imports from France was 10,000,000Z. instead of 
12,000,000^., then, in each country, the demand for bills 
drawn upon the other country would be exactly equal to 
the amount of bills to be disposed of; nothing will cause 
the bills of either country to rise to a premium, or fall to 
a discount, and the exchange would in each country be at 
par. 
Currencies Hitherto, in this chapter, we have supposed that the cur- 
have hither- jQY^Q[Qg Qf different nations are identical. We will now 

to been 

supposed examine a case where two countries, such as France and 

identical, j^j^gj^nd, have the different currencies which they possess 

at the present time, and which, in spite of reason, economy, 

and Qonvenience, they will probably maintain for many 

ages to come. 

Eow our In the French currency, the franc, as the general 

conclYtons ^-^gasure of value, occupies the same position as the pound 

must be ex- ^ . . . 

pressed sterling does in our own coinage. If the French wish to 
token the g^press the value of a landed estate, or any other kind of 

currencies -^ . . 

differ. wealth, they say that it is worth so many millions of francs. 
In order to compare values which are thus differently 
.expressed in the two countries, it will be sufficiently exact 



Foreign Exchanges. 417 

if we consider that 25 francs are equivalent to 11. sterling, book m. 
When, therefore, an English merchant sells 100^. worth of . ^^•^^^- , 
goods to a French merchant, the former would receive a 
bill drawn upon the French merchant for 250O francs, 
and not, as we have above supposed, for lOOZ. If imports 
from France to England exceed in value the exports 
from England to France, the exchange will be against 
England, and in favour of France; but, if this be the case, 
England will have to make larger payments to France 
than France has to England, and there will consequently 
be in England a greater demand for bills drawn on France 
than there exists in France for bills drawn on England. 
Consequently, a bill drawn on France for 2500 francs 
will in England be worth more than lOOZ. ; and, on the 
other hand, a bill on England for 100^. would in France 
be worth less than 2500 francs. It is manifest that the 
premium at which bills drawn on France are in England, 
and that the corresponding discount at which bills drawn 
on England are in France, cannot exceed the cost of trans- 
mitting specie from the one country to the other. If the 
cost of this transmission should be two per cent., then, 
under the circumstances we have assumed, it is quite 
reasonable to conclude that a bill upon France for 2500 
francs would in England sell for lOlZ. 10s., and that a 
bill upon England for 100^. would in France only sell for 
24j63 francs. 

It should moreover be borne in mind, that when \h.Q In tMs cane 
exchans^e is ao^ainst one country and in favour of another, \^fT^T? 

o & J } oj- one coun- 

specie must not only be sent from the former to the latter try may he 
country, but the money of the former country will also be ^.^fathdyto 
depreciated in value, when compared with the money of the ihat of the 

1 , , , other. 

latter country. 

When the exchange is against England, suppose that 
a person who intends to travel in France takes 100?. to 
some money exchange office in London, for the purpose 
of having it changed into French coin. Let us continue 

EE 



41 8 Manual of Political Economy. 

BOOK III. the assumption tliat, when the exchange is at par, 25 francs 
cH.^ix. ^ ^^^ equivalent in value to 11. sterling. The question now 
arises. How many francs will be given at a money exchange 
office in London for .100^., when the exchange is against 
England ? Since the exchange is against England, English 
money must be sent to France to adjust the trade between 
the two countries, but no French money will for a similar 
purpose have to be sent to England. The money exchange 
offices will therefore be compelled specially to obtain 
French money. from France; they must therefore be com- 
pensated for the cost of importing this French coin, and 
consequently 11. sterling of English money will exchange 
for less than its equivalent value in French money, namely 
25 francs. English money, therefore, would be depreciated 
in value, compared with French money, and this deprecia- 
tion would not be avoided, even if the English money 
were exchanged for French money in Paris, instead of 
in London; for since the exchange is against England, 
English money is sent from England to France, therefore 
there is a surplus of English money in France, or, in other 
' words, English money is at a discount when compared 
with French money. 

If, on the other hand, the exchange is in favour of 

England, the English money will be comparatively of 

greater value than French money, and 11. sterling will 

Meaning of exchange for more than 25 francs. Suppose that a person 

^Jf'^^^^' wishing to exchange English money for French money 

change in goes to an exchange office in London. A favourable ex- 

ih%8 case. Qi^^j^gQ implies that there will be a surplus of French 

money in England, because French money has been sent 

to England in order to adjust the trade between the two 

countries. People therefore will be anxious to dispose of 

this French money, for it will not in England perform the 

ordinary functions of money. English tradesmen will not 

accept 3 francs instead of half-a-crown, cab fares cannot 

be paid in French coin, and a person in London with only 



Foreign Exclianges. 419 

French money in his pocket would be subject to as many book hi. 
inconveniences as if a traveller were in Paris with only . — ;^ 1, 
English money in his pocket. Those persons, therefore, in 
England to whom French money has been sent to pay for 
the excess of exports to that country, will be anxious to 
convert this French money into English money. This 
French money cannot be sent back to France, without 
involving the cost of transmission. A considerable loss 
will also be incurred if the other alternative is adopted, 
and the French money which is in England is melted in 
order to be sold as bullion. These considera^tions show 
that French money must be depreciated, or, in other 
words, when foreign exchanges are technically, said to be 
against a country, the money of the country will be de- 
preciated, when compared with the money of those coun- 
tries with regard to which the favourable exchange is 
supposed to exist. 

Our remarks would seem to show, that when two Causes 
countries such as France and England are considered, the 7ncreasTthe 
bills of exchange which are drawn iipon either of these premium or 

, . J. •l^ ' , , • p 1-1 discount on 

countries cannot either rise to a greater premium, or tall mig 0/ 
to a greater discount, than that which would be repre- exchange 
sented by the cost of transmitting the precious metals cost of 
from the one country to the other. Some facts, however, if(insmit- 
may be recalled, which seem to contradict this conclusion. 
For instance, it is well known, that when the news of 
Napoleon's return from Elba was first brought to England, 
the price of bills drawn upon foreign countries suddenly 
rose ten per cent. Mr. Mill has remarked, "Of course 
; this premium was not a mere equivalent for cost of 
carriage, since the freight of such an article as gold, even 
with the addition of war insurance, could nev^r have 
; amounted to so much. This great price was an equiva- 
; lent, not for the difficulty of sending gold, but for the 
' anticipated difficulty of procuring it to send; the expecta- 
j tion being, that there would be such immense remittances 

ee2 



420 Manual of Political Economy, 

BooKiir. to the Continent in subsidies, and for the support of 
. ^_" /^' , araiies, as would press hard on the stock of bullion in the 

country." 
The staie- When the exchange is against any particular country, 
Ihispre^ or, in other words, when bills upon foreign countries are 
onmm is selling at a premium, it may be thought that this premium 
ll^t^of^ ^^ must be always exactly equivalent to the cost of trans- 
transmiu mitting the precious metals. It may be urged, that an 
must he mo- unfavourable exchange is caused by the necessity of trans- 
cUfied, mitting specie, in order to pay for an excess of imports 
over exports, and that therefore the competition of mer- 
chants amongst each other to purchase foreign bills of 
exchange, in order to avoid the cost of transmitting specie, 
will force all foreign bills to a premium equivalent to this 
cost of transmitting specie. If, for instance, the cost of 
sending specie from England to France was two per cent, 
an English merchant who had payments to make to 
France would gain some profit, if he paid as high a 
premium as 11. 195. per cent, for bills drawn on France. 
It would therefore seem to be proved, that when the 
exchange is unfavourable, bills must be at a premium 
equivalent to the cost of transmitting specie. There are, 
however, other considerations which modify this con- 
clusion, and which also explain the fact, that when the 
exchange is unfavourable, and bills at a premium, this 
premium does not remain constant, but varies from day 
to day. 
hecause the It is no doubt true, that bills would invariably be 
l,mnsmis- ^* ^ premium approximating to the cost of transmitting 
sion of specie, if it was always necessary to export specie, when 
fe avoided ^^® foreign exchanges happened to be unfavourable to a 
country. But it must be borne in mind, that the balance 
which a country has to discharge, when the value of its 
imports exceeds the value of its exports, may often be 
liquidated without the transmission of any specie. For 
instance, foreign commerce is liable to constant fluctua- 



Foreign Exchanges. 421 

tions; various circumstances may at any time occur which book in. 

may increase a country's exports or diminish its imports, ^' Z^- . 

and thus an unfavourable may be rapidly converted into 

a favourable exchange. If such an event is anticipated, 

those who have payments to make in foreign countries 

will delay transmitting specie, or, at any rate, will refuse 

to pay for foreign bills a premium equivalent to the cost 

of transmitting specie. Such a delay may be obtained by 

various arrangements; for instance, a person whose credit 

is good can always readily renew his bills at the current 

rate of interest. 

There are, moreover, valid reasons for assuming that an ^nd an 
unfavourable exchange cannot be of long continuance ; for ^j^g g^. 
specie cannot be withdrawn from the currency of a country, change 
to pay for an excess of imports over exports, without ^j^i^^ct ten- 
increasing- the value of ffold in that country, or, in other <^e*^c.v ^o 

COVTCCt 

words, without reducing general prices. But a reduction it^^if^ 
of general prices at once exerts a tendency to prevent the 
export of specie. If general prices are lowered in a country, 
the exports of the country will be increased, because it 
will be more profitable to sell commodities in foreign 
countries ; under the same circumstances, the imports will 
be diminished, because foreign countries will not export so 
large a quantity of commodities to this particular country, 
when generally lower prices prevail in it. It therefore 
appears, that an unfavourable exchange cannot long con- 
tinue, if the specie which is transmitted to foreign coun- 
tries is supplied from the money of the country. It has, 
however, been already stated, that the precious metals are 
often transmitted from one country to another, as an 
ordinary commodity of commerce. Such an export of 
. specie can scarcely be said to denote an unfavourable ex- 
. change, since the specie is not withdrawn from the money 
9 of a country, and no effect is consequently exerted on 
^ general prices. Australia, for instance, annually sends 



42 2 Manual of Political Eco7iomy. 

10,000,000?. of gold to England, but this export of gold 
from Australia does not show that the foreign exchanges 
are unfavourable with regard to that country; this gold is 
simply exported from Australia as an ordinary commodity 
of commerce. 




423 



CHAPTEE X. 

THE FUNCTIONS OF CEEDIT. 

IN political economy the very name of credit is ominous book hi. 
of confused and never ending discussion. Questions ^ \^—' 

concerning credit may be regarded as the polemics of our Credit is a 

science, for the subject of currency is intimately connected •^**^j?"^J*^. 
' . "^^ «^ ^ *^ subject oj 

with credit, and writers on currency continue to wrangle useless dis~ 
on points they do not understand, and continue to express ^^^^'^^'''> 
their belief that out of the intricacies of the discussions 
on currency some specific may be evolved which will 
spontaneously create wealth, and which will provide an 
adequate remedy for every national disaster. If, however, 
we bring to the consideration of this subject an unbiassed 
mind, we shall perceive that there need not be any of this 
mystery or complexity with regard to the nature and func- 
tions of credit. Credit simply signifies the relation which 
subsists between the borrower and lender; credit conse- hut is in 
quently implies trust, or confidence. One individual. A, J^Jw^, 
may have a larger amount of wealth than he wishes either 
to consume or to employ as capital. Another individual, B, 
may be greatly in want of this wealth, desiring perhaps a 
greater amount of capital to assist the industry in which 
he is engaged ; B therefore says to A, If you will lend me 
your wealth, I will pay you a certain annual sum for the 
use of it, and you may depend upon me to repay it to you 
when you demand it. If A has sufficient confidence in 
B's solvency and is satisfied with the terms which are 
offered, A will lend the wealth to B. In other words, B 



424 



Manual of Political Economy. 



Not neces 

sarily 

money. 



calls his credit into action to borrow wealth from another 
individual. A; credit therefore simply signifies borrowing 
Credit im- ^^^ lending. The borrowing does not always take place 
'plies bar- in the precise manner we have just supposed, but there is 
lending. ^^ difference in principle, although there may be some 
difference in the mode in which the transaction is con- 
ducted. 

For instance, it is customary, when wealth is lent, that 
the loan should be made in money. If, in the above 
example, the surplus wealth which A is supposed to possess 
consists of a stock of wheat, he will not, as a general rule, 
lend this wealth in the form of wheat, for he will almost 
invariably sell the wheat and then lend the money. Such 
a course is much more convenient, since a substance which 
is uniform in its value is always chosen to perform the 
functions of money. When money is lent, both the 
borrower and lende\' very accurately know how much they 
have respectively to pay and receive. But if instead of 
money, any other kind of wealth, such as wheat, was lent, 
great risk would be incurred both by the borrower and 
lender, because if the wheat were to be repaid at any 
particular time, the wheat might then be only half as 
valuable, or, on the other hand, perhaps far more valuable 
than it was at the time when it was borrowed. 

If it is borne in mind that credit is a synonymous ex- 
pression for borrowing and lending, it will be readily per- 
ceived that various circumstances are implied in the 
existence of credit. In the first place, there can be no 
credit if man has not confidence in his fellow-man. No one 
would be willing to lend his wealth, unless he believed 
that he who borrowed it would repay it. The more con- 
fident a man is in this belief the less remuneration will he 
require for the money which he lends. If A lends two 
sums of 100^. each to B and C respectively, and if he places | 
much greater faith in B's honesty and ability to pay than 
he does in C's, C will of course be compelled to pay a 



Circum- 
stances 
affecting 
credit. 



TliG Functions of Credit,' 425 

much greater sum for the use of this loan than B. It need book hi. 

scarcely be said that the annual sum which is paid for the \ ,'-,> 

use of borrowed money is termed the rate of interest, and 
therefore two individuals borrowing at the same time and 
from the same individual pay a rate of interest which is 
determined by the confidence which he who lends the 
money may feel that it will be repaid, or, in other words, 
by the faith which he places in the solvency of those to 
whom the money is lent. Since B is supposed to be able 
to obtain a loan at a lower rate of interest than C, B's 
credit is for that reason said to be better than C's; hence, 
credit should be defined as the power to borrow wealth. Credit is 
This definition is more precise than, but not inconsistent to\^rrow 
with, the meaning given above ; for credit being defined as wealth. 
the relation between the borrower and lender, credit will 
be good when this relation is easily produced, i. e. when 
money is easily lent or borrowed ; or credit will be abun- 
dant when there is a large number of persons ready to 
enter into the relation on both sides, and a large amount 
of wealth ready to be lent and borrowed. 

We have said that C's credit would not be so good as This power 
B's, if C is compelled to pay a higher rate of interest for ?^^^5^. *^ 

' ^ r J p individuals 

money borrowed than B. But it must be remembered 
that B and C are supposed to borrow money in the same 
place, and in the same country. If B borrowed in England and in 
and C in India, C would be compelled to pay a higher ^^^^ 
rate of interest than B, although C's credit, so far as 
depended upon personal character and means, might be 
quite as good as B's. It would in fact be necessary for C to 
pay this higher rate of interest, not because his own credit 
was not good, but because a general higher rate of interest 
prevails in India than in England. This is tantamount to 
saying that the credit of India is not so good as the credit 
of England. The circumstances which determine whether 
the credit of any particular country is good or bad are 
very similar to those on which depend the credit of 



426 



Manual of Political Economy. 



individuals. If the government of a country is unsettled 
a revolution may quickly displace the ruling dynasty, 
and the obligation incurred by one government may be 
disavowed by the next which takes its place. If this be so, 
those who lend money must be compensated for the in- 
creased risk which is incurred. States have not unfre- 
quently exhibited the dishonesty of insolvent traders, and 
have repudiated their obligations. Those who subscribe to 
government loans carefully examine the character and 
the -financial position of the states to whom the money 
is lent. The result of this examination is shown in the 
price of foreign stocks, for the price of these stocks form 
a measure of the credit of different countries. Russia 
can borrow money at five and a quarter per cent, when 
Turkey is compelled to pay ten and a half per cent. The 
credit of Russia therefore is twice as good as that of 
Turkey. 
Confused Hence the meaning which we attribute to the word 
notion that q^q^]^^ ig \\^q power to borrow, whether we speak of the 
capital. credit of an individual, or the credit of a state. Some of 
my readers will be no doubt surprised to find so simple a 
signification given to the word credit, for they have been 
perhaps accustomed to hear the word spoken of as of grave 
import. Some, for instance, have authoritatively told us, 
that the whole science of political economy will be un- 
folded to those who properly appreciate the great maxim* 
that credit is capital. But according to our ideas, this 
is not a maxim pregnant with meaning, but is a phrase 
which is evidence of confusion of thought. The funda- 
mental idea which we attach to capital is, that it is a fund 
from which to feed, and otherwise to support labourers. 
Credit is a power to borrow, and surely labourers cannot 
be fed on a power to borrow. The power to borrow, if ex- 
ercised, may obtain capital. Just in the same way, the 
muscles of my arm will, if required, lift fifty pounds; but 
it would be very absurd to say, that my muscles were fifty 



The Functions of Credit, 427 



pounds. We shall proceed to point out the real assistance book hi. 
which credit lends to the production of wealth, and in v_ff;i_^ 
doing so we shall show, that if there was no credit much 
less wealth would be saved, and a great portion of that 
which is saved would cease to be productively employed. 
But political economists are not justified in affirming the 
incorrect paradox, that credit is capital, although it may 
be shown that the existence of credit must materially aid Credit aids 
the production and distribution of wealth. If there was ^^o/^y ^^' 
no credit, all the capital of the country must be applied weaZ#A,% 
to industry by those individuals who actually possess it. ^{keaccmim- 
A person who saves wealth, but does not wish to em- Ution and 
ploy it upon any industrial purposes, would be prevented ^Jppitcation 
using it as capital if, either from want of confidence in his 0/ capital. 
fellow-men, or from any other reason, he was debarred 
from lending this wealth to those w^ho would be willing to 
devote it to the further production of wealth. The amount 
of wealth which is in this manner saved by those who wish 
others to employ it as capital is enormously great. Some 
conception of the amount may be formed from glancing 
over the accounts of such institutions as the London and 
Westminster Bank. The average amount of the deposits 
which are held by this bank exceed 18,000,000/. This 
vast amount of wealth has been collected from a multi- 
tude of depositors, who are in very different positions in 
society, and who are engaged in the most varied occupa- 
tions. Experience teaches, that even the most prudently 
managed bank need not keep in the form of money an 
amount exceeding one-third of the sums deposited with it, 
in order to meet the every-day demands which are made 
upon the bank by those who have deposited money. If, 
therefore, a bank has deposit accounts amounting to 
18,000,000/., at least 12,000,000/. of this sum may be 
applied by the bank to some productive purposes; the 
profits of a banking establishment mainly arise from such 
an application of their deposits, for the bank either employs 



428 Manual of Political Economy. 

BOOK III. the money directly as capital in carrying out some indns- 
v_2f:^f_ trial work from which profit is realised, or, as is generally 
the case, the bank lends the money to others, who use it 
as capital, and who pay a certain rate of interest for the 
loans they have received from the bank. But suppose that 
either from the instability of the government, from a 
general low state of morality, or from any other cause, the 
credit of this country should be destroyed, and as a conse- 
quence all confidence in banks and other commercial in- 
stitutions should be lost: all those who now deposit in 
banks the money which they do not require for their im- 
mediate wants, would then cease to do so, since they would 
be prompted to hoard it for the sake of security. Now we 
may form some idea of the extent to which such an event 
would affect the capital of the country, when we remember, 
that the credit of the London and Westminster Bank 
enables that company to gather together 1 8,000, OOOZ. in 
deposit accounts; of this amount a sum equivalent to at 
least 12,000,000^. is employed as capital. The remarks we 
Method hj have just made suggest one of the many modes by which 
hanJcsin- Credit economises the resources of the country. These 
crease the deposit accounts represent the sums which tradesmen and 
resources of others keep to meet their current expenses ; for instance, 
the country, a person who receives an official salary of 1,000Z. does not 
wish to invest it, because he will have to live upon it 
during the year. He would also be afraid to keep so large 
a sum in his own house. He therefore deposits it in a 
bank, and gradually draws upon it as he requires it; in 
this manner, the smallest sums which, though not imme- 
diately wanted, would not be invested as capital, are col- 
lected by banks, and a large proportion of the aggregate 
sum which is so collected is sure to be productively em- 
. ployed as capital. 

Accumu- ■*■ *^ . '- 

latedwealth Again, many persons who accumulate wealth would not 
usehdh ^^ ^^ ^^ *^®y were obliged to engage in business themselves, 
credit. and to Superintend the industry which may be supported 



^1 



The Functions of Credit, 429 

by the wealth which they save. An individual, A, may 
have an annual income of 2,000^. One thousand pounds a 
year suffices for his ordinary expenditure, and he is glad to 
save the remaining 1,000/., if he can profitably invest it. 
But very probably he does not wish to engage in any indus- 
try himself, or if he is already so engaged, he may not wish 
to extend his operations by bringing more capital into his 
business. He will therefore of course be anxious to lend 
the 1,000/. which he is disposed to save to some one whom 
he can trust, and who will pay him interest for the use of 
it. If it is assumed that the money is lent to B, B pro- 
bably desires to borrow it, because he thinks that he can 
so advantageously employ this sum as capital, that there 
will be a considerable profit remaining to him, after he 
has paid interest for the use of the loan. If, however, A 
placed no confidence either in B's credit or the credit of 
any other individual, he would not be able to lend the 
1,000/. he saves, and therefore the money would not be 
employed as capital, unless A chooses so to employ it him- 
self; w^e have however supposed that he is unwilling to do 
this, and therefore in all probability he would spend the 
1,000/., if the absence of credit prevented him from finding 
a profitable investment for it. The consequence of this 
would be, that the industry of the country would be seri- 
ously affected, because the accumulation of capital would 
be greatly impeded. 

There is another mode in which the existence of credit Undertalc- 
most powerfully assists the production of wealth. We ^qreatjor 
have frequently remarked, that nothing contributes more individual 
powerfully to promote the wealth of a nation than its ^are carried 
public works. The railways, the docks, the canals, and ^^*^ % 
the roads of this country are not only the surest signs of 
its wealth, but have also been the chief instruments of its 
industrial greatness. But such an undertaking as a railway 
requires an amount of capital for its construction too 
large to be supplied by one individual. Such works, 



430 Manual of Political Economy. 

.BOOK III. therefore, are carried out by a company, wlio collect the 
\^' . requisite amount of capital from a great number of indi- 
viduals ; these individuals however would not entrust their 
capital to the company, unless they could place confidence 
in it, or, in other words, unless its credit was good. 
Moreover, not only must the personal credit of the directors 
of the company inspire confidence, but it is also necessary 
that the credit of the country in which the works are 
carried out should stand high, because great risk will be 
incurred by sinking large sums of money in works which 
would be easily destroyed if the government was in a state 
of anarchy, and property consequently insecure. For 
instance, there have been those who have inconsiderately 
said, that England is not justified in maintaining her 
Advantage supremacy in India, and that the people of that country 
landma^' "^^^^^ ^^ benefited if her rule should cease ; but the 
confer u^on absence of those public works which we have enumerated 
^ *^' has been the chief cause that has impeded the industrial 
progress of India, and her great resources can only be 
developed by the carrying out of such works as railways, 
roads, and canals, which are now being made in that 
country with great rapidity, by capital which is chiefly 
subscribed in England. Now it is evident that this capital 
woLild not be subscribed, unless it was believed that Eng- 
land's rule would be continued, and that her power would 
be exerted to preserve the rights of property. India has 
been afflicted with centuries of anarchy ; one petty despot 
has only been displaced by another, who would show an 
equal anxiety to oppress and rob the miserable people 
upon whom the tyranny was exercised. England cannot 
confer a greater blessing upon India than by establishing 
credit in that country, for if by the proper administration 
of justice the people of India should be made to feel 
confidence in their fellow-men, wealth would be saved, and 
the vast resources of that country would be developed by 
capital accumulated by its own people, 



The Fwictions of Credit. 431 

We have now said enough to show, that credit as power- book m. 
fully as any other agent contributes to the production and > ^^\ ^' ■ 
accumulation of wealth. Although credit is not capital, Thus credit 
yet a great portion of the capital of each country is un- ^^'^^/^^ 
doubtedly due to the existence of credit. The higher the 
credit of a community is, the more completely can every 
particle of Avealth which is saved be economised. Credit, 
in fact, enables all the wealth which is saved to be im- 
mediately applied to the most productive purposes. 

Having in this chapter described the influences exerted 
by credit on the production of wealth, we shall in the next 
chapter discuss the manner in which the prices of com- 
modities are affected by credit. 



432 



CHAPTER XL 



THE INFLUENCE OF CKEDIT ON PKICES. 



WHEN an individual, B, uses his credit in borrowing 
from A a certain sum of money, it is natural to sup- 
Different poso that A will require some written acknowledgement of 
credit "^'^ liability to him. The written acknowledgement of such 
indebtedness may be given in many different forms, and 
these various forms may be regarded as the tangible 
evidence of the fact, that credit has been given and taken. 
It would be well to describe some of these forms in detail. 
Bills of We will commence with a bill of exchange, for we have 

exchange. 2lrQdudLy remarked upon this instrument of credit. It is 
well known, that the wholesale transactions of commerce 
are seldom carried on by ready money. If A sells B a 
cargo of coal for 1,000^., A receives an acknowledgement 
of the debt due to him in the form of a bill ; this bill is a 
written promise*, that B will pay a certain sum to A on a 
particular day, and in the bill it is stated what considera- 
tion has been given for the debt which has been incurred. 
The time which is to elapse before the bill falls due is 
a matter of previous arrangement between A and B, 
but upon this point different customs prevail in various 
trades, which are very uniformly observed. When, for 
instance, a draper purchases goods of a warehouseman, 
a bill for three months is almost always given, but in 
the book trade it is customary, to give a bill for six 
months. 

* The promise is almost invariably given in the form of a written order 
to a banker, who becomes the medium of payment. 



The Influence of Credit on Prices. 433 

A bill of exchange affords a convenient instrument for book ttt. 
facilitating credit, for if in the above transaction B, who is . ^h. ^ ^i. ^ 
supposed to purchase the coals, should be a stranger to A, rpkey are a 
it is probable that A may require some additional security convenient 
besides the written promise of B to discharge the debt, credit. 
Some bank with whom B does business may have perfect 
confidence in him. B will go to this bank and say, 
A is not satisfied with my promise to pa}^, but he no 
doubt would be if a public institution like yours would 
give him some testimony as to my solvency; the bank 
grants this request by placing its name upon the back of 
the bill, which is technically called endorsing the bill. 
This endorsement makes the bank liable to pay the bill in 
the event of B refusing to do so ; A then accepts the bill, 
being satisfied with this additional security. Now A may 
perhaps be in want of ready money, and does not wish to 
wait until the bill falls due. He therefore gets this bill 
discounted; discounting the bill means selling the bill 
for ready money. If the person who discounts this bill 
for A is satisfied with the security which is provided by 
the two endorsements which are already on the bill, he 
accepts the bill without any further endorsement; but if 
he is not satisfied, he may also require the endorsement 
of A, the person from whom he purchases the bill. A bill 
of exchange may be thus bought and sold any number of 
times before it falls due, and perhaps each time it is so 
bought and sold it receives an additional endorsement, 
and thus it not unfrequently happens that before a bill 
is finally presented for payment it is almost completely 
covered with endorsements. 

When credit is given by banks, it usually assumes the -S""-^^" ^of^s 
form either of bank notes or cheques. The distinction "" ^ ''^'^^ ' 
between a bank note and a bill of exchange is this : a bank 
note is a written promise to pay a certain sum whenever 
it may be demanded, whereas a bill of exchange is a 
written promise to pay a sum at a certain date, which is 

FF 



i 



434 Manual of Political Economy. 

BOOK III. stated on the bill. Moreover, in almost every country 

« '^ — '-^ certain privileges are given to bank notes which are not 

as issued ly possessed by any other instruments of credit. Almost every 
State banJcs country has a State bank, and the bank notes issued from 
these institutions are generally made a legal tender. In 
this country, any debt can be discharged by offering to 
pay the sum in Bank of England notes, and, similarly, in 
France a debt can be discharged by paying the amount 
in notes issued by the Bank of France. But the notes 
which are issued by private banks are not a legal tender. 
These State banks are subject to certain' restrictions, which 
vary in different countries. Our own bank is regulated by 
the Bank Charter Act, the provisions of which we shall 
hereafter explain. It is only necessary here to state, that 
this Act provides securities that the Bank of England shall 
not issue notes beyond a certain amount, unless it possesses 
a corresponding quantity of gold to provide for their pay- 
ment. Although a Bank of England note is as legal a 
tender as gold coin, yet our currency is said to be con- 
vertible, because the Bank of England is bound, if the 
demand is made upon it, to give gold in exchange for its 
notes. But the currencies of some other countries are 
inconvertible, and when this is the case, no one has a right 
to demand coin in exchange for bank notes, although they 
may be a legal tender. 
or private But besides the notes which are issued by the Bank of 
hanks. England, private banking firms are allowed to issue notes 
under certain conditions. A moment's consideration will 
show, that a bank note, whether issued by a State establish- 
ment or by a private firm, is simply a convenient form for 
bringing into practical use the credit which may be 
possessed by the bank. All those who place perfect con- 
fidence in the solvency of a particular banker will be 
willing to accept his notes. A banker therefore, whose 
credit is good, can circulate a great number of his notes in 
his own neighbourhood, his notes being willingly accepted 



The Influence of Credit on Prices. 435 

by those to whom he is known ; such notes however are book hi. 
not convenient for payments which have to be made at v ^^^ \^^' . 
a distance, to those to whom the banker is a stranger. 
The notes of private bankers are never made a legal 
tender, and if the notes are presented for payment at 
the bank from which they are issued, it is compulsory 
that either coin, or notes which form a legal tender, should 
be given in exchange for them. It is, however, manifestly 
to the advantage of a banker to issue notes ; for suppose 
60,000^. of these notes are kept in circulation, it is ascer- 
tained, by experience, that an amount of legal tender 
equivalent in value to one-third of the notes issued will 
be sufficient, if kept as a reserve, to meet all the notes 
which are presented for payment. A banker, therefore, 
whose notes circulate to the extent of 60,000^., has 40,000/. 
at his free disposal, to place in some profitable invest- 
ment. 

It is hardly necessary to describe a cheque. Individuals Use of 
deposit money with bankers for purposes of convenience ^^^v^^^- 
or safety, and of course they can withdraw any portion of 
this money when they have a payment to make. But if 
A wants to pay B 1000?., A does not first withdraw 1000^. 
from his bank and pay the amount to B, who would then 
probably deposit the amount received, in the bank with 
which he might happen to do business. A much more 
convenient course is adopted : A, instead of paying the 
money to B, gives him a cheque, which is simply an in- 
struction to A's banker that the amount stated in the 
cheque should be paid to B when he demands it. A is 
thus saved the trouble of withdrawing money from his 
bank, and B is also saved the trouble of sending so much 
money to his bank, for now he has only to transmit the 
cheque to his banker, who will place the amount to his 
account, B's banker taking the trouble of getting the 
cheque paid by A's banker. The trouble of doing this, 
however, is very small, for cheques will be drawn upon 

FF 2 



436 Manual of Political Economy. 

BOOK III. B's banker, and in this manner the cheques drawn upon 
■ ^'^•^^^- . one bank are exchanged for those drawn upon another. 
This exchange is daily carried on, in London, at an es- 
tablishment called the Clearing House, and it has been 
calculated that more than 1,000,000,000?. of cheques are 
annually exchanged in this manner, whilst, in order to 
effect the exchange, there is only required an amount of 
specie not exceeding 200,000Z. 
Credit is to "We have now described the chief forms which credit 
a^ubltitute assumes, and it will be perceived that bills of exchange, 
for money, bank notes, and cheques perform many of the functions 
of money. Credit, therefore, considered in this aspect, 
may be regarded in a certain degree as a substitute for 
money. We are thus led to the main subject of enquiry 
in this chapter, which proposes to investigate the influence 
produced by credit on prices. We will commence this 
investigation by explaining the manner in which bills of 
exchange, bank notes, and cheques respectively perform 
the functions of money. 
Tliefunc- Although, in the wholesale transactions of commerce, 
^moneymay Commodities are almost invariably sold for money, yet it 
he per- very rarely happens that any money is interchanged 
bUhof ^ between the buyer and seller. In such transactions, bills 
exchange, of exchange provide a ready substitute for money, and it 
frequently happens that the same bill of exchange supplies 
a substitute for money in many transactions besides the 
original one which first called the bill into existence. We 
have already said that bills are often almost covered with 
endorsements before they are finally presented for payment. 
If, for instance, B receives from A a bill for 1000?., B may 
endorse this bill, and with it purchase commodities to the 
value of 1000?. from C. C in a similar way may again 
endorse the bill, and with it purchase goods from D, and 
the same process may be continued any number of times. 
Put when this is done, it is manifest that the bill is as 
efficient in its purchasing power, or, in other words, exerts 



1 



The Influence of Credit on Prices. 437 

the same influence in buying and selling, as if A paid B book hi. 
a thousand sovereigns instead of the bill, and B purchased ^ — i^ ' > 
goods from C with this money instead of paying C for the 
goods by means of the bill. As long therefore as this> bill 
is kept in circulation, it provides a substitute for an 
equivalent amount of money; for if bills were not used, 
and if no other substitute for money were provided, it is 
manifest that, when commodities were bought and sold for 
money, the money must be forthcoming. In discussing 
the laws of price, we established as a principle that general 
prices depend upon the quantity of money in circulation 
compared with the wealth which is bought and sold with 
money, and also upon the frequency with whicb this wealth 
is bought and sold before it is consumed. If more wealth As wealth 
is produced, and an increased quantity of wealth is also I'J^^ce^T^'cZ 
bought and sold for money, general prices must decline un- to decline; 
less a larger quantity of money is brought into circulation. 'J^JcTis^^' 
Suppose, for instance, that the production of every kind stopped by 
of wealth' is doubled in this country, and that every one ^iii^^'^ 
doubles his- purchases of commodities, and, at the same 
time, there is no increase in the amount of money in 
circulation. Upon this hypothesis) each individual, al- 
though he is supposed to purchase twice as much of 
every commodity as he did before, will only possess- the 
same amount of money with which to effect these purchases. 
He will, therefore, be only able to give the same amount 
of money for double the quantity of each commodity he 
purchases; but this is tantamoimt to saying that general 
prices will decline one half In fact, if there should be 
an increased production of wealth, if there should be more 
buying and selling, or if any other circumstance should 
occur the effect of which is to require the circulation of a 
larger amount of money; the value of money must rise, 
or, in other words, general prices must decline, unless an 
increased supply of money is forthcoming, so that a larger 
amount may be brought into circulation. When buying 



438 Manual of Political Economy. 

BOOK III. and selling is effected by bills of exchange, the necessity 
> — 1, — '-y for money is as completely dispensed with as if the trans- 
action was carried on by barter, and therefore those 
trading transactions in which bills of exchange are em- 
ployed may be also almost indefinitely extended without 
rendering it necessary to bring an increased amount of 
money into circulation. 
Jf bills ivere Again, we may look at bills of exchange from a different 
not used, j^^^^^ ^f yie^y, and consider what would be the result if 

trie money -"- . . 

in circula- they did not exist. Suppose that all the commodities 
increase or ^^'^^^^ ^^® ^ow bought and sold by bills of exchange were 
prices paid for by money; a largely increased amount of money 
would be required to be brought into circulation, and if 
this additional supply was not forthcoming, money would 
consequently rise in value, or, in other words, general 
prices would decline. Hence bills of exchange, in many 
classes of transactions, are a convenient and complete sub- 
stitute for money, and consequently, if it were not for bills 
of exchange, one of two things must happen. Either 
the money in circulation must be increased, or the money 
already in circulation must become more valuable, because 
a greater amount of money will be required to carry on 
the trade and commerce of the country ; but to say that 
money becomes more valuable is equivalent to stating that 
general prices decline. 
hence prices It therefore appears that we cannot, by a simple negative 
afectedhy ^^ affirmative, answer the question whether an increased 
bills, but by issue of bills of exchange affects prices. All that we can 
which they ^^^ '^^ ^^^^ — ^^ ^^® buying and selling which is now carried 
imply. on by bills of exchange was effected by money, then one 
of two things must occur — either more money must be 
brought into circulation, or general prices must decline. 
The influence, however, which is exerted upon prices by 
bills of exchange is not -due to anything peculiar in the 
nature or form of a bill of exchange, for it is not the bill 
which produces the influence, but the influence is produced 



The lujluencG of Credit on Prices, 439 

by the credit which is given ; and the bill is not this credit, book m. 

• • • • • CH XT 

but simply a testimony or record of its existence. This ^ 1 — 1^ 

is a fact which it is most important to bear in mind. Let Tlie same 

lis, therefore, make a few remarks upon it. It is well r'^'^^ f^ght 
' ' . , . oe produced 

known that buying and selling may be carried on by book by hooTc 
credits, instead of by bills of exchange. Suppose A sells ^^^ *^^* 
B a cargo of coals for lOOOZ. ; A, instead of receiving a 
bill of exchange from B, may debit him with the amount 
in his ledger. Let it be also assumed that A buys a 
quantity of coal for 1000^. from a third person C, and that 
C again buys 1000?. worth of timber from B. Then A 
appears a debtor for lOOOZ. in C's ledger, and C appears a 
debtor for 1000/!. in B's ledger. Payment will therefore 
be made by cancelling each debt, for A will cancel B's 
debt, if C will cancel As, and this of course C will be 
mlling to do if B will cancel C's. In this case, although 
the buying and selling is nominally made for money, yet 
the resort to book credits enables money to be as com- 
pletely dispensed with as if bills of exchange had been 
used; it is therefore credit, and not the particular form 
which credit may assume, that enables money to be dis- 
pensed with, and consequently produces an influence on 
prices. 

Bills of exchange are, however, more potent in their in- hut not to 
fluence on prices than book credits, simply because bills of ^ ^''^^^ ^ 
exchange facilitate credit, and call a vast amount of credit 
into action which would never be given if book credits 
were always adopted instead of bills of exchange. For 
instance, if A receives from B a bill of exchange for goods 
sold, then A has the power of increasing his credit by 
means of this bill, for he can actually convert the bill into 
money, or he can purchase commodities with it; but if A, 
instead of receiving a bill from B, simply has a register 
of his debt in his ledger, he would have no means of 
buying or selling by means of this book credit. 

Although in many transactions bills of exchange provide Banh notes 



440 Manual of Political Economy, 



BOOK III. a perfect substitute for money, yet bank notes seem more 
V ^ ;,^ '■ - completely to perform all the functions of money; and we 
are a still will therefore next proceed to enquire into the influence 
^^^^ - , exerted upon prices by credit when in the form of bank 
instrument notes. A bank note is a far more complete substitute for 
of credit, ^^q^qj than a bill of exchange, because a bank note is 
used in those cases in which money would necessarily be 
employed, if bank notes did not provide a substitute. The 
transactions, however, which are effected by bills of ex- 
change might, as we have seen, be often performed by 
book credits. Bills of exchange are seldom used, except 
in the wholesale transactions of trade and commerce, but 
bank notes form a part of the ready money which a man 
keeps in his possession, to supply the ordinary wants of 
life. If, therefore, we consider that an amount of coin 
equivalent to one third of the bank notes issued is kept 
by the bankers as a reserve, it is manifest that each bank 
note which is in circulation enables an amount of money 
to be dispensed with equivalent in value to two thirds of 
the sum which the note represents. The bank note cir- 
culation of Great Britain varies between 30,000,000^. and 
32,000,000^. If we suppose it is 30,000,000^. sterling, we 
may approximately say that, in consequence of bank notes, 
a substitute is provided for 20,000,000/. of coined money. 
We may express the same proposition in different words, 
and state that, if no bank notes were in circulation, we 
should require 20,000,000/. more money to be coined; if 
it were not coined, money would become scarcer, or, in 
other words, general prices would decline. 
The effect But it may be asked. What would be the effect upon 
of largely prices if the bank note circulation were suddenly in- 

tncreasing ^ n ^ ^• ir-i 

the bank creased? I his suggests one oi the most disputed oi the 
notecircu- currency questions. As we have before said, the bank 

cation . . . 1 1 • 

would rarxj note Circulation of England is placed under various re- 
under dif- gtrictions, the nature of which will be presently detailed. 

ferent cir- , , . ^ -^ , , 

cumstances. The purpose we have in view, at this stage of our inquiry, 



The Tnjlaence of Credit on Prices. 441 

is to investigate the effect which would be produced on book iti. 
prices if the bank note circulation was largely increased . ch- xr. 
by a removal of all restrictions which now limit its amount. 
Now, we conceive that the effect which would be produced 
entirely depends upon circumstances. Let us suppose that 
there is no change in the population, or the commercial 
condition of the country. If, under these circumstances, 
an increased issue of notes was added to the money circu- 
lation of the country, prices would manifestly rise, because 
tliere would be now more money in circulation to carry on 
the same buying and selling as was previously conducted 
by a smaller amount of money. If, however, the additional 
notes which are issued simply cause a corresponding amount 
of bullion to be withdrawn from circulation, it is manifest 
that no effect is produced on prices, and the only result is, 
that the trade of the country is carried on more economi- 
cally, because these notes, which are simply pieces of 
paper of no intrinsic value, perform with equal efficiency 
all the purposes which were previously fulfilled by the 
gold, which is now supposed to be dispensed with. Conse- 
quently, the economy of this substitution is evident; gold 
is a valuable commodity, requiring much labour and capital 
to obtain it. We therefore have the following principles 
to guide us in an enquiry into the effects of a bank note 
circulation. 

1st. If bank notes simply occupy in the monetary cir- Tlie im^xn-- 
culation of the country the place of a corresponding value ^^J^^ ?^^^^* 
of bullion, these notes produce no effect on prices. whether 

2nd. If it can be shown, that either by the repeal of the L^^e an 
Bank Charter Act, or by any other cause, the bank note ec[%ud 
circulation of the country can be increased without with- luUion or 
drawing from circulation a corresponding amount of increase the 
bullion, it is manifest that the aggregate money circulating ^culation' 
in a country will be augmented, and general prices will, 
as a consequence, undoubtedly rise. 

Although a cheque is not so complete a substitute for Cheques are 



442 



Manual of Political Economy. 



a less com- 
plete substi- 
tute for 
money. 



Credit 
exerts a 
more 
powerful 
influence 
on prices 



hy increas- 
ing the pxir 
chasing 
power of 
the country 



money as a bank note, yet clieques often provide facilities 
for dispensing with money whicli are possessed by no other 
instrument of credit, except a bank note. We have already 
explained in what manner cheques render the employment 
of money unnecessary, and we have stated that the returns 
of the Clearing House show that payments to the amount 
of more than 1,000,000,000^. sterling per annum are made 
by means of cheques, without requiring more than 200,000Z. 
of specie. There can be no doubt that, if it were not for 
cheques, the great majority of these payments must be made 
by money, and in that case the money circulation of the 
country would have to be increased to a corresponding 
amount. If it were not so increased, a greater amount of 
buying and selling would have to be performed by the 
money circulation which a country possessed, and this is 
equivalent to saying that general prices would decline. 

We have now investigated one part of the influence which 
is exerted by credit on prices, but it must be borne in 
mind that credit exerts upon prices another distinct kind 
of influence, which has as yet been scarcely noticed. 
Hitherto, in this chapter, we have confined our attention to 
those effects on prices which are due to the circumstance 
that credit supplies, when in the form of bank notes, bills 
of exchange, or cheques, a substitute for money, more or 
less complete. But by far the most powerful influence 
exerted by credit on prices is caused by increasing the 
purchasing power of the country. If it were not for 
credit, the demand for commodities would frequently be 
much less than it is. In fact, when credit is freely given, 
the demp.nd for a commodity may increase without any 
assignable limits; and when the demand is so stimulated, , 
prices may temporarily rise in a very striking manner.- 
We lay particular stress upon the word temporarily, because 
we have often repeated that the price of all commodities, 
except those whose supply is absolutely limited, must 
always in the long run be regulated by their cost of pro- 




The Influence of Credit on Prices. 443 



duction. But although cost of production determines a book iti. 
point towards which the prices of commodities must ulti- > ^^-j^^- . 
mately have a tendency to approach, yet the prices of 
commodities may temporarily either very much fall short 
of, or be greatly in excess of, their cost of production. As 
we have before said, these variations in price are due to 
sudden fluctuations in the demand and supply of any Variations 
particular commodity, and nothing is more efficient in J^^J.^cLI^^ 
producing these fluctuations than the existence of an hy credit, 
extended system of credit. If no credit was given, and if 
everything was consequently paid for by money directly it 
was purchased, there would be little speculation; com- 
modities would generally be bought as they were wanted ; 
everything connected with trade would be regular and 
uniform, and there would be no great variations in the 
demand. We know that this regularity in demand occurs 
with regard to those commodities which are not, from their 
nature, bought upon credit for speculative purposes, and 
the price of such commodities never deviates much from 
their cost of production. 

As an example, bread is a perishable article ; it is bought and are 
to be immediately consumed, and of Course no one uses his ^[.J^^/^J* 
credit to accumulate large stores of bread; hence the price loughtfor 
of bread is always regulated by its immediate cost of pro- Sf^posJ^^ 
duction. The price of bread of the same quality is uniform 
throughout large towns and districts, and if the cost of 
producing a loaf of bread is slightly lessened by a fall of 
2s. a quarter in the price of wheat, the effect of this is at 
once shown by a corresponding fall in the price of bread. 
On the other hand, many commodities, such as wheat, are 
largely bought on credit for speculative purposes, and are 
consequently subject to the greatest fluctuations in the 
demand. Suppose some event occurs which forbodes a 
coming war ; merchants may then think that, if the war takes 
place, our supplies of various commodities will be greatly 
diminished, and they therefore at once commence to make 



444 Manual of Political Econom^y. 

BOOK III. speculative purchases. Every man can use his credit as a 
^ — -^~^ purchasing power; if he exerts his credit to purchase a 
commodity, he of course assists in increasing the demand 
Example of iox it. When the first rumours arose in 1854 of coming 
J^g^^^g^^.^^ hostihties with Russia, large speculative purchases of 
war, tallow were made, because it was thought that all impor- 

tations of that commodity from Russia would be stopped. 
The merchants who speculated in tallow employed their 
credit; they did not withdraw their capital from profitable 
undertakings in which it might be invested, for the pur- 
pose of purchasing this tallow; they simply employed their 
credit in the form of bills of exchange, and paid for the 
tallow by these bills. They no doubt intended, either to 
re-sell the tallow before the bills, fell due, or, if they did 
not do this, they would probably pay a certain sum for 
permission to renew the bills from time to time. If a 
commodity in which speculation thus takes place does 
not rise in price as anticipated, many of the speculators 
are sure to be unable to meet their credit engagements, 
and a commercial crisis inevitably ensues. Each com- 
mercial crisis affords the most striking instances of the 
wonderful extent of an individual's purchasing power, when 
he brings his credit into full activity. Mr. Mill refers to 
a very remarkable speculatian in the tea trade, which is 
described in Tooke's 'History of Prices.' We will give a 
brief summary of some of the facts, which are very in- 
structive. 
Tea in the It was expected, in consequence of our dispute with 
''china ^ China in 1839, that there would be a rise in the price of 
tea. Many retail grocers were therefore extremely anxious 
to lay in a stock of tea, and they accordingly commenced 
making speculative purchases. One grocer is particularly 
mentioned who had a capital of 1200^., all of which was 
locked up in his business. If, therefore, he wished to 
purchase tea and pay for it by money in his possession, 
he probably would not have been able to lay out more 



The hifluence of Credit on Prices. 445 

than 100^. But he adopted a different course, and em- book nr. 

ployed his credit to its full extent as a purchasing- power. ^ L> 

He ordered chests of tea from every wholesale tea merchant 
with whom he was accustomed to deal; they did not think 
of consulting each other, and had therefore every reason 
for supposing that the tea which he thus purchased was 
required for the legitimate purposes of his trade. He, 
probably following the custom of his trade, gave bills due 
at three months. Before, however, these bills fell due, 
tea had risen in price, and he was therefore enabled to 
realise considerable profits. Now it will be observed, that 
here was a grocer in a small way of business, who purchased 
large quantities of tea, and who therefore exerted an in- 
fluence in increasing the demand for it without employing 
a single farthing of money, either in the form of coin or 
bank notes. The profits which the grocer, in the first 
instance, thus realised, he applied in the following manner 
to extend his speculations. If a grocer buys tea upon 
credit, it is customary that he should deposit as a security 
2Z. upon each chest of tea purchased. The realisation of 
profit in the first instance enabled the grocer to pay this 
deposit, and his speculative dealing rapidly expanded. A 
few cargoes of tea, however, unexpectedly came to London, 
having sailed before the Chinese ports were closed ; a immense 
sudden fall in price took place, the OTocer could not meet P^'-'^clmsing 

\ J • xu r 1 • -I- poweo^ pro- 

ms engagements, and m the course 01 his exammation as duced by 

a bankrupt it was shown that he had purchased 4000 ^^^<^^'^- 

chests of tea at a cost of 80,000?., the loss upon which 

was 16,000?. In this case, therefore, a comparatively poor 

man was enabled, by using his credit as a purchasing power, 

in a short time to buy 80,000?. worth of tea. Many 

others adopted the same course, and every grocer in the 

country might have employed his credit in a similar 

manner. It is, therefore, almost impossible to assign any 

limit to the rise of price which may take place when the 

demand for commodities is stimulated by purchases made 



44^ Manual of Political Economy, 

upon credit. The rise, as we have before said, was only 
temporary, for directly a panic commences credit is as 
sparingly allowed as it was before recklessly given, and 
prices rapidly fall, and they often sink as much below 
that position of equilibrium which is determined by costi 
of production as before they went beyond it. 
The suppo- It must be evident, from the examples we have given, 
banknotes ^^^* every contrivance which facilitates the employment 
are the most of Credit as a purchasing power increases the influence of 
purchasing Credit on prices. Many people believe that bank notes 
power gave are more efficient as a purchasing power than any of the 
£anJc other instruments of credit, and since they hastily con- 
Charter ceive that commercial panics are caused by a reckless 
employment of credit, they therefore conclude that 
restrictions upon the issue of bank notes provide the best 
remedy for the prevention of panics. These opinions 
prompted the passing of the Bank Charter Act. This Act 
was introduced, and carried by the late Sir Robert Peel in 
1844; its leading provisions admit of a brief and simple 
explanation. The main object of the measure was to re- 
strict the issue of bank notes, and it was therefore enacted 
that the Bank of England should not be permitted to issue j 
notes beyond a certain amount unless a corresponding I 
amount of specie or bullion was retained by the bank. The 
limit thus fixed was 14,000,000^., it being thought that the i 
funds, and various other property which the bank might 
possess, would provide a sufficient security to meet an issue i 
of 14,000,000^. of notes. The bank was, however, compelled | 
to keep in its possession specie exactly equivalent in value [ 
to every note that was issued beyond 14,000,000^. If, for ! 
instance, the Bank of England note circulation is at any | 
time 18,000,000^., the bank is compelled to retain in its | 
coffers 4,000,000^. of bullion or specie. In order that the 
public may feel sure that this obligation is faithfully obey- 
ed, the bank is compelled to publish in the 'London 
Gazette,' a weekly statement of its accounts ; this statement 



The Influence of Credit on Prices. 447 

shows at a glance what is the specie reserve at the bank, book m. 
and what also is its note circulation. The Bank Charter < — :^ — l^ 
Act also provided that no banks which might be estab- 
lished after the passing of the measure should be permit- 
ted to issue their own notes, and the old banks were not 
allowed to increase the issue of their own notes. High 
financial authorities, however, fundamentally differ as to 
whether this Act has the power of doing what it was 
intended to effect. 

Many people suppose that the Act secures the converti- TkeActwas 
bility 01 our paper currency, but this is entirely erroneous, tosecurethe 
for if the Act were rescinded to-morrow it would still be com-erti- 
as obligatory on the Bank of England as it was before to ^^nJc note, 
give specie for every note presented to them, if the demand 
was made upon them to do so. The Act compels the 
bank to keep a certain amount of bullion or specie to 
meet these demands, but this obligation need scarcely be 
enforced in order to preserve the solvency of the bank, 
for the remarkable prudence and wisdom which, distin- 
guishes the management of that institution would always 
be an adequate guarantee that sufficient bullion and specie 
would be voluntarily retained by the bank to meet the 
demands made upon it. But those who most strongly 
support the Act base their advocacy not upon any security 
which is provided for the solvency of the bank, but upon lut to pre- 
the restriction which the act imposes upon the unlimited l^^^ P'>"ices 

^ . . . oeinff raised 

issue of bank notes. These persons maintain, that during b//an undue 
a period of active speculation, the bank, if left uncontrolled, ^^*^^^ ^^^^ 
might most powerfully stimulate credit, by large issues of 
bank notes, and thus contribute to force up the prices of 
various commodities to an unnatural point; the pheno- 
menon which, as we have before said, always accompanies 
a commercial crisis. There can, however, be no doubt 
that the credit purchases which are made in times of active 
speculation are rarely, if ever, effected by means of bank 
notes; bills of exchange and book credits are the instru- 



44^ Manual of Political Economy. 

BOOK iir, ments of credit which are almost invariably employed. 

cH. XI. ji^^ instance, the retail grocer who in 1839 was enabled to 

This can he P^^i^chase 80,000^. worth of tea, although he only possessed 

done with- a Capital amounting to 1200^., all of which was locked up 

mics^^ in his business, never thought of employing bank notes. 

The Bank Charter Act did not then exist; the bank was 

perfectly free to issue as many notes as it pleased, yet it 

was just as difficult for this grocer to obtain bank notes on 

credit as it would have been for him to have borrowed 

money. It would, therefore, have been impossible for him 

to have speculated to any considerable extent if he had 

used bank notes, instead of either bills of exchange or 

in the first book Credits. It thus appears that, at any rate in the 

stages of primary staofes of speculation, credit ensraffements are as 

speculation. ^ ^o^i ^ ^ o o 

freely entered into, whether the issue of bank notes is 
restricted or not. 
The Banh It is, however, maintained that the Bank Charter Act 
AcTcomes comes into operation in the later stages of speculation, 
into ojiera- for after these credit purchases have been continued some 
llterperiod. "^^^^^ many find it difficult to meet their engagements, 
bills begin to fall due, and an anxiety is shown to get 
them renewed. This, therefore, is the time when the bank 
is pressed to discount bills ; large amounts Vv^ill be willingly 
paid for accommodation, and the rate of discount conse- 
quently rapidly rises. This rise in the rate of discount 
affords the bank an opportunity of realising large profits, 
if freely permitted to issue an unlimited amount of bank 
notes. But the Bank Charter Act effectually restricts the 
amount of accommodation which the bank can give, for it. 
cannot issue notes without purchasing an equivalent value 1 
of bullion, and if compelled to do this, the profit of the) 
transaction is of course destroyed. In 1848 and in 1857, 
Temporary the Only two panics which have occurred since the pass- 
''■a^^^A t'n ^^& ^^ ^^ Bank Charter Act, the pressure upon the bank 
18 is and for accommodation was so severe that the Act had on both 
'^ these occasions to be temporarily repealed. By adopt- 



Tlie Influence of Credit on Prices. 449 

ing this course, tlie pressure was immediately relieved, book m. 
The failure of those was not prevented who had speculated v_£^^:^^^ 
recklessly and unfortunately, but the increased accommodar- 
tion which the bank was enabled to give saved many firms, 
who were not only solvent but wealthy, from succumbing 
under the sudden contraction of credit which is sure to 
accompany every panic. If, therefore, this relief had not Importance 
been provided^ many would have been ruined without any fjf^f 
fault of their own; for even the most prudent ^im.^ in afforded hj 
this country conduct their business upon a system of '^^P^^^- 
credit; they pay for the goods they purchase by bills, and 
they are justified in assuming that, if they wish it, these 
bills will be renewed, or advances will be made to them 
by their bankers, unless some very exceptional circumr 
stances should occur. The credit of a firm may perhaps 
be partly based upon the possession of property, and in 
ordinary times there is no difficulty whatever in immedi-" 
ately obtaining money upon this property to almost, the 
full extent of its value. However, in the general course 
of commerce a merchant is seldom required to settle any 
of his transactions by money, for he both pays and receives 
bills in almost all his transactions. But, in a commercial 
panic, there is a complete collapse of credit; bills which 
were renewed before will not be renewed now unless some 
ruinous premium is paid amounting perhaps to ten,, twelve, 
or fifteen per cent. A general feeling of distrust and in- 
security is prevalent throughout the commercial world, and 
consequently no one will, if he can avoid it, accept any- 
thing but money in payment of the debts that are due to 
him. All the usual sources of accommodation are closed. 
Banks can no longer afford to make advances, for the 
pressure upon them is particularly severe, since their cus- 
tomers hastily withdraw their money which may have been 
left on deposit. During a commercial panic there is a dearth 
of the legal currency of the realm ; in fact, this must be so, 
because when credit collapses payments have to be made in 

GG 



450 



Manual of Political Economy. 



The relief 

was 

afforded 

with re- 

marJcahle 

ease. 



In the ordi- 
nary condi- 
tion of 
trade the 
Banh Act 
is inojpera' 
tive. 



money which were never paid in money before; conse- 
quently a largely increased supply of money is temporarily 
required, and if it is not forthcoming, money must obtain 
a scarcity value, just in the same way as the value of any 
other commodity would be affected if the demand for it 
were suddenly and largely increased. 

None of the ordinary substitutes for money, such as 
bills of exchange, will suffice to relieve this scarcity, be- 
cause these substitutes are only instruments of credit, and 
the severity of the panic is due to a thorough collapse of 
credit. But Bank of England notes, if allowed to be issued, 
will afford relief, because as long as these notes are pay- 
able on demand, people are as willing to accept them as 
the current coin of the realm. Now it is very remarkable 
that, on both the occasions when the Bank Act has been 
suspended, relief has been afforded by an extremely small 
additional issue of bank notes. In 1857 this additional 
issue of notes did not exceed 1,000,000^. sterling; in a 
few days the majority of these notes were returned to the 
bank, and the circulation was again in its normal condition. 
The relief may, therefore, be really regarded as a mental 
remedy. When the Bank Act was suspended, people 
thought that there would no longer be a dearth of money; 
they were, therefore, no longer so desirous to receive every 
payment in money. Credit was thus again gradually 
given as before, and the bank was consequently not 
obliged to increase its issue of notes, since the cause no 
longer existed which had so stimulated the demand for 
money that it obtained a scarcity value. 

When trade is in its ordinary condition, we believe that 
the amount of the Bank of England note circulation would 
be the same, whether the Bank Act existed or not. As 
long as bank notes are convertible into coin upon demand,,! 
the amount of bank notes which is kept in circulation id 
determined by exactly the same causes as those which 
regulate the amount of the copper and silver coinagej, 



The Influence of Credit on Prices, 451 

Unless something new should occur, such as a change in book tit. 

CH X I 

the mode of conducting business, it would be impossible > — ^v — '-^ 
to keep in circulation double the amount of our present 
copper coinage. Bankers could not induce their customers 
to take copper instead of silver; when a tradesman draws 
from his bank the wages to pay his workmen, he takes 
just as much gold, silver, and copper money as he believes 
he shall require ; the pence he only uses to pay odd sums, 
for he would never think of burdening one of his workmen 
with eighty-four cum±brous pennies, instead of paying 
him the amount in silver. Similar considerations apply 
to bank notes; for certain purposes they are extremely 
convenient. If a person who is travelling takes a con- 
siderable sum of money about with him, bank notes are 
particularly useful; they occupy so much less space, and 
are so much lighter than gold. But the repeal of the 
Bank Act would be as powerless to make an individual use 
bank notes in those cases where he now employs gold, as it The ordi- 

iTi,«n , •j.ir-1 nary hanh 

would be to mduce a man to use copper mstead 01 silver ^^Qt^circu- 
money. We therefore conceive that, in ordinary times, lationisnot 
the amount of the bank note circulation is entirely inde- ''the^Banh 
pendent of the Bank Act; we also think that this Act Charter 
exerts no influence in the first stages of a time of specu- 
lation. 

When, however, continued speculation produces a com- Prejudicial 
mercial panic, it has been shown, on both the occasions ^S^^^t ^ 
when such a panic has occurred, that credit cannot be 
restored without a suspension of the Act. We therefore 
consider the act to be prejudicial in its effects. It is 
generally practically inoperative ; it is true, that in a com- 
mercial crisis its effects are felt, but on such occasions its 
suspension has always hitherto become necessary. Nothing 
can be more unfortunate than these repeated suspensions; 
no one can tell from hour to hour what will be done, and 
yet every one is sure, that if the Act is suspended, an 
enormous revulsion will take place in the money market. 

GG2 



452 Manual of Political Economy. 

BOOK III. The rate of discount in 1857 almost immediately fell from 
> ^^• ^^- , ten to four per cent. All this uncertainty increases the 

excitement and distrust which are sure to be too prevalent 

in a period of financial difficulty. 
Inconverti- Inconvertible bank notes are the only other instruments 
^. ^^ ' of credit which it remains for us to notice. In our own 

7lOtCS. 

country, every bank note can be immediately exchanged 
for coin. A private bank is obliged to give either Bank 
of England notes, or coin, for the notes which it issues; 
and the Bank of England is obliged to give coin in ex- 
change for all its notes ; our bank note currency is there- 
fore said to be convertible. The ' currencies of some 
other countries are not in this position, and at the com- 
mencement of the present century our own Bank notes 
were not convertible into coin. From the year 1797 to 
1819, cash payments were suspended in this country, or, 
in other words, during this time the Bank of England was 
permitted to issue notes without being obliged to give 
coin in exchange for them. At the present time the United 
States afford the most striking example of a large issue of 
inconvertible paper currency. The civil war which is being 
so vigorously waged in that country has severely tried the 
resources of the national exchequer, and it has been con- 
sequently attempted to meet the financial pressure by an 
issue of treasury notes, which may be regarded as bank 
notes not convertible into coin on demand. We shall 
presently consider some of the effects of this issue of 
treasury notes, and we shall trace its influence on prices. 
They may Before proceeding further with this subject, it is neces- 
leahi/al ^^^J ^^ point out the very different consequences which 
tender. follow, according as an inconvertible currency is or is not 
made a legal tender. If an inconvertible currency is made 
a legal tender, an opportunity is immediately afforded to 
a government to defraud its creditors to an unlimited ex- 
tent, and the whole monetary arrangements of the country 
at once suffer a most disastrous disturbance. We have 



The Influe7ice of Credit on Prices, 453 

already laid great stress upon the fact, that when a cur- book m. 
rency is convertible, the bank note circulation cannot be ■ — ^J— ^ 
forced beyond its natural limits, because, if the bank note 
issue is unduly increased, the notes are sure to be almost 
immediately returned to the bank, in order to be ex- 
changed for coin. But there is no practical limit to the 
issue of inconvertible bank notes, and this is especially 
the case if these notes are made a legal tender. A govern- 
ment may pay the interest of its debt in these notes. 
Government contractors may also have the debts due to 
them discharged in these notes ; the contractors, for instance, 
who have supplied the Federal army with stores and pro- 
visions have been paid in this manner. In fact, so in- 
definite is the power of issuing inconvertible notes, that 
the American Government has been enabled in a few 
months to float 40,000,000?. of these notes, whereas the 
Bank of England notes in circulation does not exceed half 
this amount. Inconvertible notes will be as freely accepted 
as coin, if people have confidence that an inconvertible 
currency is only a temporary expedient, ^ad that the 
government will take scrupulous care never to permit the 
issue of inconvertible notes to exceed an amount which can 
with certainty be ultimately redeemed. 

It is, therefore, possible to conceive that exceptional WitUn 
circumstances may occur, during which an inconvertible ^iZiuTtJieu 
currency may be issued, if kept within proper limits, need not 
without disturbing the finances of the country. For y^^^^JJ^^^ J 
instance, there can be little doubt that the American ^^^ country, 
civil war created a demand for a greater amount of money 
to be circulated in that country ; more money A7as in fact 
required, because the raising of a large army, and support- 
ing it in the field, would render it necessary to make 
many more payments in money. If the issue of an incon- 
vertible currency in America had gone no further than to 
satisfy this demand for a greater sum of money to be 
brought into circulation, no one's confidence in the finan- 



454 Manual of Political Economy. 

BOOK III. cial credit of the government would have been shaken, and 

> ;, — '-^ the inconvertible currency would have exerted no effect on 

hut if in- prices. But the American Government has far outstepped 
^^ond thole ^^^^^ legitimate limits ; the inconvertible notes continually 
limits the accumulate, and the people, although buoyed up by an 
must be ^^ excitement engendered by the contest, are beginning to 
depredated, suspect that the government will never have the power, 
even if it has the desire, to redeem these notes. These 
notes therefore are now no longer willingly accepted, and 
the consequence is that they have fallen to a discount, or^ 
in other words, gold has advanced to a premium. At the 
present time, gold is in America at a premium of thirty 
two per cent., consequently notes which represent 132^. 
will only exchange for 100^. of specie. It therefore follows, 
that the government, and all other individuals who now 
pay with these notes debts which were incurred before the 
currency was depreciated, virtually defraud their creditors 
of thirty two per cent, of the amount which in all equity 
is due to them. If the issue of these notes is continued, 
the depreciation of the currency is also sure to go on with 
steady rapidity, and it is quite possible that before long 
gold may advance to a premium of one hundred per cent.* 
If, therefore, an inconvertible currency is made a legal 
tender, nominal prices may be forced Tip in proportion to 
the extent to which the currency is depreciated. Suppose, 
for instance, that the American Government wished to 
contract for a supply of rifles. A rifle manufacturer would 
say, I am perfectly willing to sell my rifles at 10^. each, 
but if I sell them to the American Government, I must 
obtain at least 13^., for they will pay me in their depre- 
ciated currency, and 13Z. in their notes is barely equivalent 
in value to 101. in gold; the nominal price of rifles in 

* These predictions have been amply verified. The issue of inconverti- 
ble paper has been continued by the United States Government, and now, 
in the autumn of 1864, the premium on gold in that country is 120 per 
cent. 



The Influence of Credit on Prices, 455 

America would rise thirty per cent., in consequence of its book iil 
depreciated currency, and the same would be the case with - ^' J^^' . 
every other commodity. 

It cannot be said that any injury or injustice is done Ifnotmade 
if inconvertible bank notes are not made a legal tender, ^^er no 
although the issue of these notes may indicate a financial ^jp^stice is 
policy disastrous to a country. When these notes are not the credit 
a lesral tender, no one is oblio^ed to accept them ; if ^ ^^ 

• T • 1 1 1 X 1 J 1 1 c 1 T Government 

an individual does take them, and afterwards discovers is destroyed 
that the o^overnment cannot meet its obliQ:ations, the loss ^.^ ^ ^^^^^ 

. . . . issue of 

which he suffers is as much his own creation as if he them. 
were to accept a bill of exchange from an insolvent trader. 
Such notes cannot exert the same nominal influence on 
prices as that which we have just ascribed to incon- 
vertible notes when made legal tender. If inconvertible 
notes are not made a legal tender, there is no reason 
why prices should be estimated in them. Such notes 
would always serve as a barometer to measure the credit 
of a government, for as confidence in a government di- 
minishes, these inconvertible notes would be constantly 
falling to a greater discount. The French Revolutionary 
Government of 1792 adopted the expedient of issuing 
inconvertible notes in the form of assignats, and they at- 
tempted to maintain the value of these assignats by as- 
suring the people that they were the paper representatives 
of the confiscated landed property of France. But the 
value of an inconvertible note is not increased, although 
it is nominally issued as the representative of certain 
property, unless people can have an assurance that those 
people who hold these notes will have equal claim to the 
property,. and that no more notes will be issued than will 
be equivalent in value to the property on which their 
security is pretended to be based. What would be the 
value of a mortgage on an estate, if the owner of it could 
create any number of mortgages, all of which should have 



45 6 Manual of Political Economy. 

an equal claim to the property? The French people soon 
showed that they placed no faith in these assignats, and 
they became so rapidly depreciated, that an assignat of 
2000 francs was scarcely sufficient to purchase a cup of 
eoffee. 



457 



I 



CHAPTER XII. 

ON THE EATE OF INTEEEST. 



N tlie minds of most people, every question concerning book m. 
currency is so intimately connected "with the rate of 



interest, that it will be advisable in this place to discuss Rate of 
the subject in a distinct chapter; and it is the more neces- ^^ ^^^^ ' 
sary that we should take this course, because the price of 
many kinds of property is directly regulated by the current 
rate of interest. 

It was observed, in our remarks upon profits, that gross 
profits are made up of the three following components: — 
First, insurance against risk; secondly, wages of superin- 
tendence ; and thirdly, interest on capital. This last com- 
ponent may be regarded as a remuneration for saving. 
The amount of the last component may be estimated by 
the interest which can be obtained upon capital, when 
invested in securities, which, according to the general 
opinion of the community, involve no risk whatever. 1m. It may u 
our own country, this certainty against risk oi loss is pro- England hy 
vided by the public funds, and therefore the interest ^^^ i^^^^^, »/ 
which can be obtained on money, when invested in the-fj^ncig^ 
funds, always affords a measure of the current rate of 
interest in this country. 

The price of funds varies slightly from day to day, and 
consequently the current rate of interest must also be 
subject to daily fluctuations. But although the current 
rate of interest is liable to these constant variations, yet 
through a long succession of years they are confined within 



45 S Manual of Political Economy. 

BooKm. very narrow limits. The English Funds at the present 

OFT XTT • <— ' X 

> — 1^ — '^ tmie annually pay 3^. upon each 100^. of stock ; when, 
which is therefore, Consols are at lOOZ., the current rate of interest 
Ttard ^^^' '^^ ^^^1^6^ per cent. The lowest price which Consols have 
reached during the last twelve years has been 88?. ; money 
invested in Consols at this price would pay an interest of 
about three and three-sevenths per cent.; and therefore, 
the current rate of interest, though subject to constant 
fluctuations, has not, when estimated in the price of funds, 
varied so much as half per cent, during twelve years. 

In the language of e very-day life, the current rate of 
interest is said to be determined, or rather to be denoted, 
by the price of money. If an individual, a company, or a 
foreign government, wished to obtain money from the loan 
market, they are obliged to pay a certain price for the 
use of it, in the same way as they would be if they 
purchased any other commodity; the price which is so 
paid is represented by the rate of interest which is promis- 
though dif- ed by the borrowing party. Suppose the Russian Govern- 
thelratein ^©nt cannot obtain a loan in our market under five per 
other coun- cent., whereas our own government can at the same time 
borrow money at three per cent., those who lend money 
to our government think that they incur no risk of loss, 
and therefore a remuneration of two per cent, is given for 
the risk which is supposed to be incurred when lending 
money to the Russian Government. With this remunera- 
tion for risk we are not concerned, when investigating the 
current rate of interest. 
The rate of Now it is evident that there is some point which may 
^subjeetto ^® regarded as a position of stable equilibrium about which 
small the current rate of interest in this country oscillates, for 

about a'^^ although Varying from day to day, yet it always approxi- 
point. mates to about three and a quarter per cent. This point, 
therefore, about which the oscillation takes place, may be 
reerarded as the averag^e or normal amount of the current 
rate of interest. We consequently must make two distinct 



On the Rate of Interest, 459 

investigations. In the first place, we must enquire into bookiii. 
the causes which determine the average current rate of > — L^ — 1^ 
interest, for the question may be naturally asked, Why 
should not the rate of interest fluctuate about either 
two or about four per cent., instead of keeping with so 
much constancy to about three and a quarter per cent. 
After having made this investigation, we shall then pro- 
ceed to account for those small fluctuations in the rate 
of interest which are almost of daily occurrence. It 
would thus appear, if we adopt the language of the 
money market, and speak of the price of money instead 
of the rate of interest, that the laws which determine 
the price of money require the same mode of exposi- 
tion as those which regulate the price of every other 
commodity. In the chapters on price it was explained, 
that the price of each commodity was subject to con- 
stant variations, which were caused by fluctuations in 
the demand and supply; but at the same time these varia- 
tions always gravitated to a certain point, which is deter- 
mined by the cost of producing the article, and which has 
been denominated by political economists, the natural price. 

The first problem, therefore, which presents itself for The current 
solution is this. Why should the rate of interest in this '^^restde^' 
country, upon the best security, be now always about three v^'^^^^s upon 
and a quarter per cent, i why should it not be either much i^^i^^ ^f 
more or much less than this — say, for instance, five per capitcd and 
cent., or two per cent.? A century since, no money could to the de- 
he borrowed in this country, even by government, at less ^««c?5 of 
than five per cent.; whereas, in Holland, the government 
has frequently obtained loans at two per cent. The rate 
of interest is primarily determined by the capacity and 
desire the people of the country have to accumulate capital, 
compared with the demand which there may be for the 
capital which is so accumulated. Now, as we have before 
remarked, the amount of wealth which is saved will vary 
cceteris paribus with the rate of interest which can be 



460 



Explana- 
tion of the 
difference 
between 
rates of in- 
terest in 
different 
countries. 



Manual of Political Economy, 

obtained. If five per cent, was the current rate instead 
of three per cent., there would be a greater inducement 
offered to every individual to save, and consequently a 
greater amount of capital would be saved. But on the 
other hand, the demand to borrow capital varies in- 
versely with the rate of interest, for there will be a 
greater demand to borrow when money can be obtained 
at three per cent., than when it is necessary to give 
five per cent. If, therefore, the rate of interest was 
five per cent., there might be an amount of capital ac- 
cumulated more than sufficient to meet the demands of 
those who wished to borrow; if, however, the rate of 
interest was only two per cent., the demand of those 
who wished to borrow might far exceed the amount of 
capital to be lent. An adjustment takes place similar 
to that which regulates the price of commodities, for 
the rate of interest must ultimately settle down to such 
a point as will equalise the demand to the supply, or, in 
other words, the amount of capital accumulated must 
satisfy the demands of those who wish to borrow. 

The principle just enunciated affords an explanation of 
the various rates of interest which prevail in different 
countries. The Dutch are more frugal in their habits 
and less expensive in their mode of living than we are. 
A less powerful inducement will therefore make them 
abstain from spending, and consequently two per cent, 
interest on capital may exert the same influence in causing 
the Dutch to accumulate as would be exerted upon the 
English by an interest on capital of three per cent. It 
therefore appears that the amount of capital accumulated, 
or, in other words, the current rate of interest which 
prevails through an average of years, may partly depend 
on national character. In countries where the government 
is unsettled and property insecure, the rate of interest 
is certain to be high, because under such circumstances 
it would be impossible to find any very secure invest- 



On the Rate of Interest. 461 

.EGnt, and consequently a portion of the interest re- book m. 

ceived might always be considered as an equivalent for « — 1^ ' , 

the risk of loss incurred, just in the same way as people 

of this country always expect to obtain a high rate of 

interest from hazardous speculations. In India, a high 

rate of interest has always prevailed, for there property 

has been insecure, the people being constantly pillaged 

by the native rulers who tyrannised over them. In a In Ausira- 

such as Australia, the rate 01 /^^-^^ jg_ 
interest is sure to be higher than in an old thickly peopled cawse pro- 
country like our own. In this case the high rate of j^igj^^ 
interest is not to be accounted for, as in India, by a 
want of security with regard to property. We have already 
remarked, with reference to Australia, that a generally 
high rate of profit is sure to prevail when there is a 
plentiful supply of fertile land. But if the average rate 
of profit which can be realised in trade is high, the 
rate of interest must necessarily be also high. If farmers 
in Australia on the average obtain a profit of twenty per 
cent., whereas farmers in England only obtain a profit of 
ten per cent., an Australian farmer will pay a much 
higher rate of interest for capital which he might wish 
to borrow with a view to extending his business, than 
an English farmer could possibly afford to pay. Every 
circumstance therefore in a country which tends to raise 
the average rate of profit must also produce an increase 
in the rate of interest; and, on the other hand, the 
rate of interest will be lowered by every circumstance 
which tends to reduce the average rate of profit. 

We have shown in a previous chapter'^ that the average ^^ ^^^^ ^^ 
rate of profit rises or falls as the cost of labour is ^e'^cost of 
increased or decreased ; it has been also explained that obtaining 
the cost of labour is less or greater according as food is 
cheaper or dearer; hence, a bountiful supply of cheap food, 

* Chap. V. Book il. 



462 Manual of Political Economy. 

BOOK III. wlietlier imported from other countries, or obtained froix. 
^CH. XII. ^^^ ^^^^ g^-j^ ^y agricultural improvements, exerts a direct 
influence to raise the average rate of profit, and conse- 
quently to increase the average rate of interest. But 
in a country like our own, the rapid increase of popu- 
lation tends to make food become more expensive, and 
therefore the question, whether the general rate of profit, 
and consequently the average rate of interest, will de- 
cline as population advances, must be determined by con- 
sidering whether agricultural improvements and foreign 
importations of food will suffice to meet the demands of 
a larger population without increasing the expense of 
obtaining food. 
The price The price of many kinds of property directly depends 
ofvroperty ^^^^ ^^^ average rate of interest. Suppose from any 
pends itpon circumstance such as the cheapening of food, or from 
tatroYin- ^'^^ opening up of new and eligible investments for 
terest. capital, that the rate of interest should rise throughout 
England, say from three to four per cent.; a correspond- 
ing decline must take place in the price of all such 
securities as the funds, railway debentures, and other 
investments, the interest upon which is fixed. The price 
of railway, mining, and other shares, would also decline; 
for the price of these shares is now so regulated by the 
general competition in the money market, that the divi- 
dends paid upon these shares must be sufficient, not only 
to return the interest given by investments which are 
perfectly secure, but, in addition to this, an adequate 
equivalent for the risk incurred. The price therefore of 
such shares must decline, if the rate of interest increases. 
The price of land would also be affected by either a 
rise or fall in the general rate of interest. In oar own 
country, land is considered as secure an investment 
as Consols. There are many advantages associated with 
the ownership of land which are not enjoyed by a fund- 
holder; the possession of land gives social position, and 



On the Rate of Interest. 463 

political influence, and also affords an opportunity for book m. 
enjojring the pleasures of a country life. Money invested , ^h. ^^ii.^ 
in land does not return so large an interest as if it were 
invested in the funds, for the advantages we have just 
enumerated are considered to afford a compensation for 
the smaller interest received. If, therefore, the general 
rate of interest should rise, the price of Consols would 
decline, and the price of land would also decline, because 
land would be expected to pay a higher rate of interest 
than before. 

When it is said that the price of land will decline The price 
with a rise in the rate of interest, it must not be &^]^- fenTalh/^^ 
posed that land necessarily diminishes in value as the /<*^^ «« ike 
rate of interest advances. The particular influence which '^'terlsf rise's 
is exerted on the price of land by a rise in the rate of 
interest may be understood from the following simple 
example : — Let it be supposed that money invested in land 
ought to return the same interest as money invested in 
the funds; we may consider this interest to be at the 
present time three per cent. A landed estate, therefore, 
the nett income from which was 3000^. a year would sell for 
100,000?. But the same estate, if the nett annual returns 
from it continued to be 3000?., would only sell for 60,000?. 
if the rate of interest should advance from three to five 
per cent., and if people still expected to obtain the cur- 
rent rate of interest from money invested in land. Upon 
the hypothesis we have made, the price of this estate 
and all other landed property would decline forty per 
cent, if the rate of interest advanced from three to five ' 
per cent. It must, however, be borne in mind, that the 
causes which affect the average current rate of interest 
may also affect the returns to landed property, or, in 
other words, the rent of land. Our conclusion that the 
price of landed property would decline forty per cent, 
if the rate of interest advances from three to five per 
cent, is based upon the assumption that the rent of land 



464 Manual of Political Economy. 

BOOK III. remains unchanged; the current rate of interest, in fact, 
' — 1^ — '-> simply determines the number of years' purchase which 
land will realise. It may, however, be remarked, that 
most of the circumstances which produce a rise in the 
rate of interest will usually decrease the rent of land ; thus, 
the rate of interest is raised by a diminution in the cost of 
labour; cheap food decreases the cost of labour, but when 
food is cheap, agricultural produce is also cheap, and 
farmers cannot pay so high a rent for the use of land. 
Again, if the rise in the rate of interest is not accompanied 
by any change in the price of agricultural produce, the 
farmer's profits will be the same as they were before; he 
will not, however, be satisfied with the same profits, 
because the average rate of profit throughout the country 
will rise if the rate of interest is increased, and his rent 
and for two must consequently be reduced. It therefore appears that 
chstinctrea- ^ ^-^^^ ^^ ^-^q rate of interest will generally reduce the 
price of land in two distinct ways; in the first place, 
as the rate of interest advances, the number of years' 
purchase which land will realise diminishes ; in the second 
place, the causes which produce a rise in the rate of 
interest generally exert an influence to decrease the rent 
of land. 
Causes A remark may here be made to meet a difiiculty which 

7o leep Tp ^^y suggest itself to some of our readers. It may be 
different ^ asked, How Can there be, with the keen competition of 
^■erestin'^' capital which distinguishes this commercial age, such a 
different difference in the current rate of interest as that which we 
' have described to exist in England and Holland? It 
might be thought that intelligent Dutchmen would place 
the same confidence in our funds as they would in their 
own government securities, and that consequently capital 
would be sent from Holland to be invested in our funds, 
instead of being employed there at a lower rate of interest. 
If the Dutch did this on a very large scale, the supply of 
capital would of course be diminished in Holland, and 



sons. 



O/z the Rate of Interest, 465 

there would cease to be any marked difference in the rate book m, 
of interest prevailing in the two countries. But however .^^l^^ 
active the competition of labour and capital may be, 
however keen and desirous traders may be to realise the 
largest profits, and labourers to secure the highest wages, 
yet the people of each community, more or less, restrict 
the range of competition to their own country. Patriot- 
ism has achieved many blessings for the human race, but 
it has isolated nations from each other, and placed a bar- 
rier of prejudice between them. The prospect of very 
slightly higher wages would tempt our more intelligent 
workmen from London to Scotland; but a far larger in- 
ducement must be offered to workmen in order to induce 
them to undertake a shorter journey: to cross the channel 
and to settle in France. As long, therefore, as these feel- 
ings continue, very different rates of wages may prevail 
in different countries. In a similar manner, although 
there is no doubt that capital passes more freely than 
labour from one country to another, yet the people of each Confidence 
country naturally feel more confidence in their own f^^^ \y ^^-'^^^ 
government than is telt by the people 01 other nations, their own 
Hence they are willing to accept a smaller rate of interest 9^'^^^^^- 

, ^ ■*■ . . . ment. 

from their government than would satisfy foreign in- 
vestors. The French people are more dazzled by the 
splendour of their present d3rQasty than we are; the 
French Government therefore announces a loan, and so 
great is the confidence of the French people, that even 
the peasantry bring forth their long-cherished hoardings, 
and the amount subscribed is far in excess of that 
required. Our people, who are not excited by the same 
feelings, show no anxiety to participate in these loans, and 
would rather receive a much smaller rate of interest in 
their own country. Hence it is evident that although 
capital is largely invested in foreign countries, yet peo- 
ple so highly appreciate the advantage of having their 
capital invested in their own country, that very differ- 

HH 



4-66 Manual of Political Economy. 

BOOK III. ent rates of interest may prevail in two neighbouring 

CH. xir. , • 

^ nations. 

Daily flue- We have now remarked upon the chief causes which 

uiattonstn (]etermine the averao^e rate of interest which prevails in 

tke rate oj . *^ • c i • i 

discount, diiierent countries; it remains lor us to explain those 
temporary variations in the rate of interest which are 
indicated by daily fluctuations in the price of funds, or 
by frequent alterations in the rate of discount. It has 
been stated, that the price of funds has not varied more 
than twelve per cent, during many years, consequently 
there is not more than about three-eighths per cent, differ- 
ence in the interest which the funds pay when at their 
maximum, and when at their minimum price. But alter- 
ations in the rate of interest at different times would 
appear to be much greater, if they are estimated by 
fluctuations in the rate of discount. The rate of discount 
very frequently varies as much as one per cent, in the 
course of a week, and during a commercial crisis it has in 
a few months advanced from four to ten per cent. The 
Banlc of rate at which the Bank of England discounts bills is 
^atfofdis- "termed the bank rate of discount, and this regulates the 
count. general rate of discount throughout the country. The 
bank could of course have no power to control the rate of 
discount, unless it carefully followed the wants of the 
money market ; for if the bank rate of discount was higher 
than the rate at w^hich other establishments could afford 
to discount bills, no bills could be taken to the bank to 
be discounted. If, on the other hand, the bank should 
discount bills at much lower rates than other establish- 
ments, every bill would be taken to the bank, and the 
bank would be virtually resigning a large amount of profit; 
for it could evidently charge higher rates, if other discount 
houses would not do business at these low rates. The 
bank rate of discount is usually fixed each Thursday, at 
the weekly meeting of the governors, and unless some- 
thing very extraordinary occurs, it is rarely altered during 



On the Rate of Interest, 467 

the week. The bank rate of discount also regulates the book ttt. 
amount of interest which can be temporarily obtained ^^^l^lh.^ 
upon money; for joint-stock banks, such as the London 
and Westminster, allow interest one per cent, less than the 
bank rate of discount upon all sums which are deposited 
with them exceeding oOOZ. The interest upon deposits, 
for instance, would be nine per cent., when in a commercial 
panic the bank note of discount was ten per cent. 

It may seem extraordinary that there should not have 
been a greater fall in the funds and other such securities, 
when bankers would allow interest at the rate of nine per 
cent. Why, it may be said, should any one have kept Why the 
their money in funds or railway shares, which were only -{^^^^ ^ ^^ 
paying three or four per cent., when bankers would give wiore 
nine per cent, interest? It must, |however, be remembered, ^"^^^^2^- 
that every one knows that the rate of discount would only 
remain for a very limited time at ten per cent. ; it would 
rapidly, perhaps suddenly, return to its former amount; 
as the crisis subsides, the price of all securities would im- 
prove, and then those who sold their funds or shares to 
enjoy a temporary high rate of interest, would be obliged 
to repurchase them at advanced prices. 

The frequent variations in the rate of discount are not 'Rate of 
due to any permanent causes, but rather depend on the Spends v >on 
amount of money floating in the loan market, compared i^^^^e amown« 
with the amount required to support the various advances ttielmiriet 
made, and the various engagements undertaken upon «f « given 
credit. The rate of discount would immediately rise if ""^' 
any event should occur which would cause an increased 
demand for specie. Suppose, for an example, that a pro- 
spect of war with China shouVl indace our merchants to 
believe that we might for a time be shut out from com- 
mercial intercourse with that country; it so happens that 
a large proportion of the tea and silk we obtain from China 
is purchased by specie. If, therefore, there was a rumour 
of war with China, our merchants would at once send out 

H II 2 



468 



Manual of Political Economy. 



BOOK III. 
CH. XII. 



Nummary 
of the re- 
aults ar- 
rived at. 



large amounts of specie to China, for the purpose of 
purchasing tea and silk. These merchants would obtain 
this money by advances made to them on credit. If they 
had bills in their possession not yet due, they would im- 
mediately get them discounted; hence the demand for 
discount, or, in other words, the demand for specie, will be 
temporarily increased, and the rate of discount and the 
rate of interest will both rise. Any circumstance which 
causes credit to be restricted will at once produce an ad- 
vance in the rate of discount, for the restriction of credit 
means, that people are more anxious to be paid in the 
form of money. There will, therefore, be a greater anxiety 
shown to convert all such instruments of credit as bills of 
exchange into money ; the demand for money will increase, 
and the rate of discount necessarily advance. 

If, therefore, we summarise the results of this chapter, 
it may be stated, that the average rate of interest which 
prevails in any period depends upon the amount of capital 
existing in a country, compared with the various other 
circumstances which we have enumerated as affecting the 
economical condition of a nation. But those temporary 
variations in the rate of interest which are marked by 
almost daily fluctuations in the price of Consols, and in 
the rate of discount, are not determined by changes in the 
demand and supply of capital, in all the various forms in 
which it ministers to the production of wealth. These 
variations depend on the demand and supply of capital in 
one particular form, namely, money; for we have shown 
that a rise in the rate of discount is caused by an increased 
demand for ready money, usually resulting from a contrac- 
tion of credit. 



469 



CHAPTER XIIL 

THE TENDENCY OF PEOFITS TO FALL AS A NATION ADVANCES 



IT lias been incidentally remarked in the last and several book m. 
other chapters of this work, that a high rate of profit ^^- ^^^ 
is sure to prevail in young colonies which possess an j,^^ ^^^ 
abundant supply of fertile land. Moreover, the history of dencij of 
every progressive nation shows that the current rate o^^J^^^^'^ 
interest has gradually declined; it would therefore seem, 
that an advance in population and wealth is sure to be 
accompanied by a fall in the general rate of profit. 

The explanation of the different rates of profit which 
prevail in the various stages of a nation's progress, suggests 
questions of as much practical and scientific interest as 
any that are discussed in political economy. It is some- has lem 
what sino^ular, too, that these particular questions have ^^^^''^ , 

Yp, . . .. wrongiy at- 

perplexed many of the most emment writers on this science ; trihuted to 

for instance, Adam Smith failed to sfive a correct solution ^^^p?^' 

^ ° loetition of 

of the problem here presented, and Dr. Chalmers, who is capital. 
usually so clear, becomes inextricably confused when treat- 
ing of the subject we propose to investigate in this chapter. 
These writers do little more than vaguely hint, that profits 
are reduced by the competition of capital, but they never 
state in precise terms the mode in which they conceive 
the competition of capital to operate in producing such 
results. They, however, probably thought, that compe- 
tition of capital caused general prices to decline, and that 
general low prices produce a low average rate of profit. 
This is a fallacy which must be at once disposed of. 



470 Manual of Political Economy. 

General high or low prices indicate nothing with regard 
to the average rate of profit. High prices simply show 
/%7i or Zow that money has a small purchasing power, and, on the 
■prices do other hand, low prices show that money has a large 
high or low ^UTchsismg power. If, from the discovery of very rich 
rcueofpro- goi^ mines, the cost of obtaining gold should be greatly 
reduced, gold might then decline in value one half, and if 
this should be so, the price of every commodity would be 
doubled. It would not however follow, that such a great 
rise in general prices would be accompanied by even the 
slightest alteration in the average of profit. In order to 
prove this, let us enquire in what manner the position of a 
manufacturer would be affected by such a change in the 
value of gold as that just supposed. If general prices 
were doubled, the manufacturer would be enabled to 
obtain double the price for his goods; but then it must 
not be forgotten, that the money cost of producing these 
goods would also be doubled, for he would be obliged to 
pay double the price for his machinery, and for the raw 
material. His labourers' wages must also be doubled, 
because now 51. would only have the same power of pur- 
chasing commodities as 505. had before. It is therefore 
manifest, that a general rise or fall in prices is solely 
caused by an alteration in the value of the precious metals, 
and, consequently, can have no effect in determining the 
average rate of profit. 
The rate of In order that there should be no obscurity upon this 
prqfit IS subiect, let us again impress upon our readers, that the 

■primarily J ' & i^ ^ . . . 

determined rate of profit is primarily determined by the ratio in 

in wMch^^ which any wealth which is produced is distributed between 

produce is the Capitalists and the labourers, who have contributed to 

amaea. ^^^ production. Unless, therefore, the amount of the wealth 

itself is increased, the share allotted to the capitalists can 

only be augmented by diminishing the share appropriated 

to the labourers. If, for instance, the employer's share is 

one third, the labourers' share will be two thirds, and if 



The Tendency ofFvofits to fall as a Nation advances. 471 
the employer's profits should be increased, and his share book m. 



CH. XIII, 



should become one half, the labourers' wages must be 
diminished, for their share will be one half instead of two 
thirds. The proposition, though apparently so simple, is 
fundamental, and cannot be too carefully borne in mind 
by the reader. 

Adam Smith and Dr. Chalmers no doubt erroneously Phenomena 
conceived, that the average rate 01 profit was lowered by ^<^(^^ 
the competition of capital, in consequence of misinter- Smith to 
preting certain phenomena which they observed, ^^^profitl^were 
constantly happens, that when the profits of any particular loioered ly 
trade are exceptionally high, an active competition oi ^^^iiuq'^I qJ- 
capital immediately commences in the trade ; every one is capital, 
anxious to enjoy the largest possible share of these high 
profits. All those who are engaged in the trade bring 
fresh capital into it, so as to extend their operations; if, 
moreover, the high rate of profit continues for any length 
of time, many others will be tempted to engage in the 
business. This largely increased application of capital will 
sooner or later cause over-production; prices will then 
rapidly decline, and the profits realised in the particular 
trade will gradually sink to their former level. The com- 
petition of capital therefore does not produce a general 
low average of profit, it rather exerts an equalising in- 
fluence, and thus prevents the profits of any particular 
branch of industry continuing permanently above the 
average rate. It is not the competition of capital, but the instead of 
accumulation of capital, which affects the averao^e rate of f^^f'^^^^J''"' 

. . . . lation of 

profit. This is a proposition which we will now proceed to capital. 
establish. 

We have already found it convenient to employ the Theeffec- 
expression, the effective desire to accumulate wealth. Now ^^^^^^^^^^"jj. 
this effective desire is sure to increase with the social late wealth 
progress of a nation. The less civilised a people are, the ''^^^cawitry 
less care will they have for the future ; the more prudent a progresses. 
people are, the m^ore desirous will they be to save v/ealth, 



472 Manual of Political Economy. 

BOOK in. and tlius accumulate capital. It is only the most back- 
^^ \ ' ■ ward tribes who do not make some provision for the future, 
and there is no doubt that a great amount of wealth 
would be saved, even if no profit could be obtained on 
capital. People would set aside something, in order either 
to make a provision for children, or to be prepared against 
old age, and such casualties as illness. But the great 
bulk of the capital of the country is saved for the purpose 
of obtaining a profit upon its investment. It therefore 
follows, that the amount of profit which is thus obtained 
primarily determines the amount of capital accumulated, 
it is, however, impossible to tell the exact ratio in which 
the amount of capital accumulated would increase or 
decrease with a rise or fall in the average rate of profit; 
all that can be said is this, that the wealth saved will be 
greatly diminished, if the current rate of interest on the 
best security should fall from three to one per cent. On 
the other hand, the accumulation of capital will of course 
be most powerfully stimulated, if new and eligible invest- 
ments for capital should be opened up. It must, how- 
ever, not be concluded, that if at some future day our 
government should be able to borrow money at one 
per .cent., there would then be less capital accumulated 
than now. The reverse would assuredly be the case, be- 
cause such a fall in the rate of interest would prove that 
the effective desire of the people to accumulate wealth 
had been much increased; in fact, their prudence would 
become so great, that then one per cent, interest would 
offer the same inducemont to save as three per cent, does 
now. 
Connection It would therefore appear, that the amount of wealth 

between the ^yj^^ch is saved in a country at any particular time is 
amount of j j i. 

tuealth partly the cause and partly the effect of the average rate 

saved and ^£ profit, for the greater the amount of the capital which is 

accumulated, the less cceteris paribus will be the average 

rate of profit; whereas, on the other hand, the less is the 



The Tendency of Profits to fall as a Nation advances . 473 

average rate of profit, the smaller cceteris paribus will be book m, 
the amount of capital accumulated. An adjustment takes ^ — 1^, — '-- 
place between these different influences ; for it is evident, the rate of 
in the first place, that a certain average rate of profit V'^'^fi^- 
results from a particular amount of accumulation, a,nd 
secondly, the amount which is accumulated determines 
the average rate of profit. In each stage, therefore, of a 
nation's social and economical condition there must pre- 
vail a certain average rate of profit, this rate being adapted 
to the particular amount of capital which will be accumu- 
lated by the prospect of being able to obtain the rate of 
profit which is supposed to prevail. We are now in a 
position to investigate the general tendency of profits to 
rise or fall as a nation advances, for this can be conve- 
niently done by considering the principal circumstances 
which accompany a nation's economical progress, and by 
tracing the effect of the circumstances upon the average 
rate of profit. When a nation is advancing, capital and When a 
population are sure both to increase. If the population ^^^'^^^^^^J^^?^^ 
increases faster than the circulating capital of a country, capital and 
there will be a smaller proportionate wage-fund to dis- f^^^^^-^^'^'' 
tribute amongst the labourers, and their wages must in- crease. 
evitably decline. If this decline in wages is not accom- 
panied with any diminution in the industrial efficiency of 
the labourer, a smaller sum of money will be paid for the 
same amount of labour, and it would therefore appear that 
profits must consequently be increased. If, on the other 
hand, the circulating capital increases faster than the 
population, wages must advance, and the profits of capital 
will be diminished. It might, therefore, seem that an 
increase of population tends to augment the rate of profit, 
and yet such a conclusion is apparently contradicted by 
experience; for in young colonies, whose fertile land is 
only partly occupied, a high average rate of j^rofit has 
always prevailed; and, moreover, it may be observed, that 
profits decline as a country becomes more thickly peopled. 



474 Manual of Political Economy. 

BOOK III. All the phenomena which we have just described may be 

CH. XIII. • 1 1 • 1 

• ^ ' very simply explained. 

Food con- It has already been frequently affirmed, that in the 
fuiresmo' ^^^^^^^ ^^ ^^J counteracting circumstances, food requires 
labour to more labour and capital to produce it, and, therefore, 
^l^acountri/ ^©^omes more expensive as the wants of an increasing 
progresses, population render it necessary to resort to less fertile land. 
If food could be obtained in indefinitely large quantities 
without any increased cost, every advance in the popula- 
tion of the country would exert a direct influence to raise 
the average rate of profit. Now, in every old country 
the remuneration received by the worst-paid la^bourers 
may be regarded as the minimum wages, or, in other words, 
the least wages which will suffice to support the labourer. 
As an example of this, our own agricultural labourers may 
be cited, for every one who is acquainted with their con- 
dition must know that their wages could not be reduced, 
without depriving them of many of the first necessaries 
of life ; such a deprivation would diminish their manual 
strength, and decrease the efficiency of their labour. The 
wages of the agricultural labourer in this country are 
barely sufficient at the present time to provide him and 
his family with the cheapest clothing, and the simplest 
food. Let any one take the average earnings of an agri- 
cultural labourer in the west of England, and let an esti- 
mate be formed of this labourer's expenditure. We have 
frequently done this, and it corroborates a fact we have 
often observed, that it is impossible for an agricultural la- 
bourer to eat meat more than once a week, and even then 
he is powerless to make any provision against old age or 
and thus the sickness. Let us enquire what will take place if population 
Tahourin- ii^creases, and food becomes more expensive. Wq will 
creases. assume, in order to illustrate our argument, that bread 
rises in price fifty per cent. ; such an assumption is by no 
means imaginaiy, for within the last few years there has 
been in many districts in England a greater rise than this 



The Tendency of Profits to fall as a Nation advances. 475 
ill the price of meat and daiiy produce. Labourers would book m. 



CH. XT [I. 



endure much suffering if they obtained less bread than 
they are now accustomed to consume ; if, therefore, bread 
rose in price fifty j)er cent., it would be impossible for 
agricultural labourers to live on their present wages ; their 
wages therefore must be raised, or, in other words, the 
cost of labour increases, if no counteracting circumstances 
intervene to prevent food becoming more expensive as 
population advances. Hence, in a country like England, Senre two 

i-i'T •• -I ,' 1 Till • causes com- 

which IS advancing m population and wealth, two agencies j^,,^g ^^ 
are constantly exerting an influence to reduce profits. ^ozter x^ro- 

In the first place, an increased population tends to make ' 
food more expensive, but if food becomes more expensive, 
the cost of labour is augmented, and this cannot happen mcrms^cZ 
without diminishing profits. In the second place, as a ^''^ ^ . 
nation advances in wealth, the people become more pru- 
dent, a smaller return on capital will induce them to save, and in- 
and consequently, a greater capital is accumulated in pro- g^^^^^ 
portion to the profits which can be realised upon it. There 
can however be no doubt that many circumstances come 
into operation which act more or less powerfully to retard 
this fall in profits. Thus it should be borne in mind, The effect 
that only a portion of the capital accumulated in England ca^ses^s 
is invested in the country itself, either as circulating or as retarded hy 
fixed capital. Our capital is freely invested in other tationof 
countries, we subscribe to foreign loans, and by our aid capital. 
many most important railways and other works have been 
carried out in every quarter of the world. As an example 
it may be stated, that of the 15,000,000^. which has been 
spent upon the Grand Trunk Railway in Canada, nearly 
the entire amount was subscribed by English shareholders. 
Every year the field for the investment of capital in foreign 
countries is rapidly extending, and it will continue to 
extend, as the barriers of prejudice are broken down 
between different nations, and as security of j^roperty is 
spread over a wider area. Now all this capital which is 



47 6 Manual of Political Economy. 

KooK III. accumulated, but is not invested in our own country, pro- 
> ^^' ^ "^- . duces no effect, either upon the average rate of profit, or 
upon the wages paid to our labourers ; and as the field for 
the investment in foreign countries may become of almost 
boundless extent, it is quite possible to conceive, that 
capital may continue to increase, even with greater rapidity 
than it has during the past few years, without causing any 
fall in the rate of profit. If, however, this outlet for our 
savings should be at any time partially closed, a great 
stream of capital would, as it were, be turned back upon 
England; the circulating capital of the country would 
consequently be greatly augmented ; the wages paid to the 
labourers, and therefore the cost of their labour, would be 
greatly increased, and the rate of profit would rapidly 
decline. 
The decline We have now remarked upon the extent to which a fall 
alsocliecled ^^ *^^ ^^^^ ^^ profit resulting from a constantly increasing 
by agricul- accumulation of capital may be counteracted by the in- 
'protcmmts vestment of capital in foreign countries. We will next 
speak of the principal circumstances which counteract the 
decline in profits, which will be sure to accompany an 
increase in population, u.nless supplies of cheap food can 
be obtained. Agricultural improvements, and the importa- 
tion of food from countries less thickly peopled than our 
own, are the chief circumstances which enable additional 
supplies of food to be obtained without an increase in its 
cost. In the first place, with regard to agricultural im- 
provements, there can be no doubt that superior methods 
of culture have largely augmented the average yield from 
each acre of land in this country, and this larger produce 
has been obtained with a less proportionate expenditure of 
labour and capital. We need only refer to two very pro- 
minent improvements, for it is well known that much com- 
paratively unproductive land has been made to produce 
large crops of corn, by the cultivation of the turnip, and 
by the use of artificial manures. Improved implements 



The Tendency of Profits tofjtll as a Nation advances. 477 

are every year introducing greater efficiency and economy book m. 
into agriculture. Moreover, since the repeal of the corn • — - , 
laws, many million quarters of corn have each year been and hj 
imported, and if our population is to continue to increase, -v*^^ ^^'^^^^ 

r ^ r i. ^ ' zn corn, 

the extra quantity of food required must be supplied by 
increased importations. If we were compelled to obtain 
from our own soil all the additional food which an in- 
creasing population would require, food would greatly rise 
in price, the cost of labour would be increased, and profits 
decline. It is, however, probable that the importation of 
corn might be in the course of a few years almost indefi- 
nitely increased, without any augmentation in its cost. 
Only a very small portion of the land which is adapted to 
gi'ow wheat has ever yet been properly tilled, and railways 
and other means of communication will open up to us large 
corn-producing districts, from which before we have been 
virtuall}^ excluded. California has already sent us wheat, 
and the highest authorities have affirmed, that India, with 
good means of communication, could supply us with an 
almost unlimited quantity of wheat, at prices much lower 
than those which on the average of years prevail. Some 
articles of food are sure to become dearer as population ^^t^^ough 
advances ; this is particularly the case with meat and dairy tides he- 
produce. These are perishable commodities, and cannot ^^"^.^ '^^^^^- 
be sent from a great distance without considerable diffi- cheaper. 
culty and expense. Although, therefore, some articles of 
food will become dearer as population increases, yet corn 
and other such products which can be readily imported 
might become cheaper. Improved processes of manufac- 
ture are constantly cheapening articles of clothing, and 
therefore the increase in the cost of the labourer's livino-, 
wdiich we might expect would be caused by the augmenta- 
tion in the number of the population, has been to a very 
great extent counteracted, and' may continue to be so by 
the importations of cheap food, or by the cheapening of 
almost every article of clothing. Many political economists 



478 Manual of Political Economy, 

BOOK III. assume that profits must decline as a nation advances in 
> — 1-^. — '^ population and wealth, but we believe the causes which 
The decline produce this decline have been, in the case of our own 
of profits countrv, counteracted during- the last few years by those 

kas been "^ . " . j j 

actually other influences to which we have just alluded. In corro- 

f'^^z ^'^J'^ boration of this opinion it may be observed, that England's 

progress during the last quarter of a century in population 

and wealth has been unprecedented, and yet there has 

been no decided fall in the general rate of profit. 

The Those political economists who consider that a decline 

'stafi ovary • ,^ • r ji± xi? "j. 

state' 1^ ^^® 1'^"^® 0^ pront must oi necessity accompany an 

advance in population and wealth, frequently affirm, that 
material progress has very definite limits, and that the 
progress of each nation must, necessarily, sooner or later 
cease. It is, for instance, maintained, that if the rate of 
profit continues to decline, the returns to capital will, after 
a time, be so small, that no adequate inducement will be 
any longer held out for increased accumulation. Under 
these circumstances, capital will not be further increased, 
the rate of profit will have reached its lowest limit, and 
the nation then will arrive at what is called a stationary 
state. A stationary state is of course a possible con- 
tingency for any progressive country, and there can be no 
doul^t that England might soon be in this condition if those 
causes which we have enumerated, as tending to keep up 
the rate of profit, ceased to act for any length of time. 
seems to he But we think, with regard to almost all countries, that the 
laUenow stationary state was much more likely to be attained fifty 
than for- years since than it is now. During the last century, the 
^" ^" Dutch frequently lent money to their government at two 
per cent. ; this indicates a much lower rate of profit than 
has prevailed in any European country for many years 
past. Holland in the last century had no doubt very 
closely aj)proached the stationary state. But the general 
condition of Europe was then so disturbed, that com- 
paratively little capital was sent from one country to 



The Tendency of Profits to fall as a Nation advances. 479 



another for the purpose of being invested; hence, nearly all book m 
the capital Avhich was accumulated by the thrifty Dutch > — '-^lUi^ 
had to be invested in their own country, and the result of 
this was that the rate of profit which prevailed was so low, 
that no sufficient inducement was offered to increase the 
amount of capital accumulated. 

There are many other modes in which capital is ab- The con- 
sorbed, besides those which we have enumerated ; for ^Zmkitmn 
instance, the conversion of circulating into fixed capital intofxed 
tends to keep up the average rate of profit. During the l^^ds^o 
first years of the great railway extension in this country, ^c^p ^p ^m 
the average rate of interest undoubtedly rose ; there v/as a ^p^Qjff 
great demand for capital, and the tempting speculations 
which presented themselves induced many to withdraw 
capital from business, and embark it in railway under- 
takings. But when, by the conversion of circulating into 
fixed capital, the wage fund of the country is diminished, 
the cost of labour is decreased, and an influence is thus 
exerted to raise the rate of profit. Such diminution in 
the wage fund is by no means hypothetical; the wages of 
labourers have often been for a time decreased by the 
sudden conversion of a large amount of wealth into fixed 
capital, either in the form of railways, machinery, &c. 
The injury to the labourers, it is true, is only temporary, 
because machinery and useful public works greatly auo-- 
ment the productive resources of the country, and rapidly 
create a larger fund, from which future capital may be 
accumulated. 

Some people have considered that the average rate of ^ commer- 
profit is kept up or is prevented from fallino- by the destruc- ^^^''^ T'^? 
tion of capital, which always takes place m those commer- Tcee2-> it up 
cial panics which seem to recur with periodic resrularitv. ^^ ^^'^!-^^" ^ 

-^ , i. ^ o J struction of 

The phenomena which accompany these crises give colour ca^'iia^. 
to this opinion. In consequence of the increasing accu- 
mulation of capital the money market is at length said to 
become glutted with capital seeking for investment; loans 



480 Manual of Political Economy. 

BOOK III. are freely offered, and the rate of interest declines. In 
^— 1^.. ' ' such a state of things any undertaking which offers a 
prospect of unusual gain is eagerly supported; a specula- 
tive feeling is thus engendered, the excitement quickly 
blinds men's judgment, all kinds of fictitious schemes are 
brought forward, and capital is recklessly subscribed to 
carry out unprofitable undertakings. Directly the mania 
begins to subside the losses of individuals become revealed, 
and it is discovered that immense sums of capital have 
been wasted; the surplus capital which was floating in 
the money market has been destroyed, capital becomes 
scarcer and the rate of interest rises. Hence, no doubt, 
a commercial crisis produces a considerable effect in the 
rate of profit by absorbing, or rather by destroying capital ; 
but it is to be doubted whether the influence thus exerted 
is so powerful as that which is produced by those other 
circumstances which we have already described as sustain- 
ing the average rate of profit. 
The high We shall further illustrate the general remarks which 
'TJ^^yY°' ^^'^^ been made in this chapter by applying them to 
'prevails in explain the high average rate of profit which prevails in 
Australia ^ young colony such as Australia. The material condition 
of a country in the position of Australia, is characterised 
by an abundance of fertile land and by a scarcity of capital 
and labour. The economy, therefore, of an old country 
like England affords a direct contrast; for in England 
fertile land is scarce, and labour and capital are both abun- 
dant. "When fertile land is plentiful, food is sure to be 
cheap, and this will be especially true with regard to those 
kinds of food which require little labour for their produc- 
tion. For instance, immense flocks of sheep have been fed 
on the pastures of Australia entirely for the sake of the 
tallow and wool. The meat of these sheep was of no 
value whatever, until the gold discoveries brought a sudden 
accession of population; for previously there were not 
enough people in Australia to consume even a small 



The Tendency of Profits to fall as a Nation advances. 48 1 

portion of the mutton tliat was annually killed. Wheat, book iti. 
however, was not relatively so cheap as mutton, because . ^"• ^^"^•. 
the cultivation of wheat requires considerable capital and 
labour. Labour was, however, scarce, and the imple- 
ments of agriculture were expensive. Although labour and 
capital may be both scarce in such a country as Australia, 
yet it is evident that the returns to this labour and capital, * 
if applied to cultivate the soil, must be extremely great 
when it is remembered that in such a country even the 
most fertile land can be obtained at a merely nominal price. 

Now the industry of a young colony is sure to be almost Reason why 
entirely confined to apiculture, for the ffreat abundance *^ '*]''' **^^ 

J o ' o ^ country 

of fertile land at her command gives her superior advantages agriculture 
in comparison v/ith older countries. On the other hand, ""'^^ ^"^^'^S' 

^ _ ' are more 

it is impossible for a young colony to compete successfully /owm/im^' 
in manufacturing industry; she does not possess the appli- LXm^"' 
ances which manufacturers require, the machinery would 
have to be imported, and labour would be more expen- 
sive. Our o]Deratives would not, of course, emigrate to 
Australia unless they expected to obtain higher wages. 
The same considerations apply in a somewhat modified 
degree to mining industry; the gold mining of Australia 
is an exception to this, because comparatively few coun- 
tries produce gold, and therefore Australia has little 
competition. But in the case of such minerals as copper, 
which are produced both in England and Australia, it is 
impossible for Australian copper mines to compete against 
English copper mines, unless the former are far richer 
than the latter. Labour and machinery are so expensive 
in Australia, and the cost of bringing the ore from 
the mine to the coast is so great, that many a copper 
mine which is unprofitable in Australia would be a 
source of enormous wealth if it could be transferred to 
England. 

We may, therefore, conclude that the industry of a The rote of 
colony is employed in agriculture and in supplying those ■^'^•^^ 



II 



482 Manual of Political Economy, 

BOOK III. wants of tlie people for which provision cannot be made 
^f^L^IL. by importing commodities from other countries. For 
prevails besides agricultural labourers, there must, in a young 
there will colony, be bricklayers and carpenters to build houses, 
by the rate ^^^ ^^ the various retail dealers and others connected 
of profit oh- with them who minister to the daily domestic require- 

'tftl'ilPfi tilJ 

agriculture, nients of life. Since, therefore, agriculture is the staple 
industry of a colony, it is evident that the average rate 
of profit which prevails will be regulated by the profit 
which can be obtained upon agriculture. When there 
is abundance of fertile land, every one can easily become 
a farmer; hence capital would not long continue to be 
employed in house building, or in retail trades, if a 
larger profit could be realised by investing it in agri- 
culture. In order therefore to explain the high rate of 
profit which prevails in a colony, it will be necessary 
to show that the profits on agriculture are larger in a 
colony than in a thickly-peopled country. Where fertile 
land is so abundant, it is of course only necessary to 
cultivate the most productive soils. Consequently la- 
bour and capital, when applied to agriculture, will be 
far more productive in a colony than in a country like our 
own. It may perhaps, however, be said, that we have land 
far more fertile than any which is tilled in Australia. 
This, no doubt, is true, but the English farmer has to pay 
a heavy rent for the use of land, and he does not on the 
average realise greater profits than the farmer who cul- 
tivates worse land, but who pays a smaller rent. England's 
population is so great, that there is a demand for all the 
produce which can be raised from her cultivated soil; high 
rents therefore must prevail. These rents are an essential 
part of an English farmer's expense; he pays his rent for 
the use of an efficient agent of production, just in the 
same way as if he were compelled to purchase a useful 
machine. The farmer in a colony has, speaking com- 
paratively, to pay no rent ; he is saved this heavy expense. 



The Tendency of Profits to fall as a Nation advances. 483 

and there consequently remains a greater amount of book hi. 
produce to be distributed between the farmer and the ^^" ^"^' 
labourer. Wages and profits are, for these reasons, almost 
invariably higher in a colony where fertile land is abun- 
dant, than in an older country where the growth of 
population has made land scarce. 



li2 



484 



CHAPTER XIY. 



OF OVER-PRODUCTION OR EXCESS OF SUPPLY. 




Supposed 
danger of 
over-pro- 
duction. 



Over-prO' 
duction 
may have 
two mean- 
ings. 



LL political economists wtio preceded the late Mr. 
James Mill and Mr. Ricardo, and many who have 
succeeded them, seem to anticipate a general over-produc- 
tion of commodities as a possible or even probable con- 
tingency. Dr. Chalmers and Mr. Malthus went so far as 
to impress upon all, the duty of exercising a moral restraint 
with regard to the accumulation of capital; for if this is 
not done, they feared that wealth would only be created 
to be wasted, and that it would be impossible to consume 
a great portion of the commodities produced. Sismondi 
was actually opposed to the use of machinery, because he 
believed that if the production of wealth was so much 
facilitated there would inevitably ensue a general over- 
production of all commodities. 

These opinions we believe to be fundamentally erro- 
neous, and we think that the three great writers just 
enu.merated would never have supported them if they had 
clearly conceived the purport of the language they em- 
ployed. Let us therefore, as a preliminary process, assign 
a distinct meaning to the word 'over-production.' Now, 
over-production may exist in two very different ways : in 
the first place, a greater quantity of commodities may be 
produced than can be sold at remunerative prices. In 
this case there may be no deficiency in the power of 
consumption. Everything which is produced can be 
readily consumed, but those who have a demand are not 



Of Over-Production or Excess of Supply. 485 

willing to pay such a price as will remunerate those who book hi. 
j)roduced the commodities. It is difficult, from the language vff::^!!:^ 
which is employed, to determine whether this is the kind 
of over-production which is intended by Chalmers, Malthus, 
and Sismondi. It is, perhaps, more probable that they 
conceived a second kind of over-production, differing very 
essentially from this. It is possible, as a hypothesis, to 
suppose that a greater quantity of all commodities may 
be produced than people really want. In our opinion 
there never has been, and there never will be, such a 
general superfluous production. In the course of this 
chapter we shall endeavour to substantiate this opinion, 
and in doing so we shall point out the origin of those 
fallacies concerning over-production which have been so 
deeply engrafted in minds usually distinguished for acute- 
ness and accuracy. 

We will commence by considering the first kind of The evils 
over-production. It has been frequently stated in our ^^^^t T"^ 

^ . u J result from 

remarks on value and price that some particular com- over-pro- 
modity is frequently produced in excess ; the price at which fl^fsense^ 
it sells will then cease to be remunerative, and the profits of low pro- 
of those who produce the commodity consequently suffer. -^^^ 
We have also explained that these low profits discourage 
the production of a particular commodity ; in this way its 
supply is diminished, the demand is once more equalised 
to the suppi}', and prices are again made remunerative to 
the producer. When these low profits temporarily prevail 
in any branch of industry in consequence of over-pro- 
duction, it is said that the particular trade is dull or 
depressed. It is quite possible that such dullness and 
depression caused in the manner we have above described 
may exist in every trade, and if such a phenomenon should 
really occur, it would no doubt be considered by the 
writers we have mentioned to denote general over- 
production. In one sense, it would be over-production; 
but the word has a double meaning, and by the aid 



486 Manual of Political Economy, 

BOOK III. of this ambiguity the most mischievous economic falla- 
CH. XIV. ^^^^ ^^^ speciously propounded and readily assented 
are adduced to. The method adopted is the following — Certain phe- 
to prove ^ nomena are described, and are admitted to prove the 
Ulityofa existence of general over-production m one of its sigmnca- 
produchon ^JQj^g_ "When, therefore, the possibility of over-production 
xoealth than is proved, numerous events are shown to result from over- 
^mmed ^^^' Production in its other signification, and therefore the 
possibility that these events may really occur is regarded 
as proved, because the existence of over-production in its 
other sense has been admitted. Now, this method of 
reasoning affords a basis for an indefinite number of 
fallacies. We are quite ready to admit the occurrence of 
over-production, so far as it is represented by low profits, 
but we believe that there never has been, and there never 
will be, over-production in the sense that more commo- 
dities are produced than people will consume. 
Case of Let us consider the case of a market being over-supplied 

duction'of ^y some particular commodity. If the American civil 
a single war had not occurred, the cotton manufacture of Lancashire 
such as would, no doubt, quickly have presented an example of what 
cotton. ig commonly called over-production. During the years 
1859 and 1860, the Eastern demand for cotton goods was 
extremely active; prices ruled high, and unusually large 
profits were realised. Every manufacturer was consequently 
stimulated to produce on as large a scale as he possibly 
could. All the existing mills were worked to their utmost, 
and new mills were rapidly erected. The extra demand 
which caused these large profits would no doubt soon have 
been fully supplied. Manufacturers, if we may judge from 
past experience, would not have sufficiently diminished 
their production as the additional demand for cotton goods 
became gradually satisfied; the market therefore would 
almost certainly have become over- supplied, and the un- 
usual activity which had prevailed in this branch of in- 
dustry would infallibly have been succeeded by low profits 



Of Over- Production or Excess of Supply. 487 

and general dullness- of trade. In fact, activity and de- book hi. 
pression always seem to succeed each other in the cotton >^^' j^^^-, 
trade in regular cycles.. 

Although the market may be thus over-supplied with The cotton 
cotton goods, no one can suppose that these cotton goods ^^ll^ ^^^ 
will be wasted; there would be no difficulty whatever in he wonted, 
selling the goods if they were only offered at a sufficiently ^^,^ ^_^' ^''''" 
low price. These low prices may be very disastrous to manufac- 
the manufacturer, but what he loses, is gained, or is saved ^l^{^ jg 
by those who purchase cotton goods; there can therefore ^em25omr% 
be no waste — all that happens is simply that the producers 
of certain commodities miscalculate the extent of the 
demand when these commodities are sold at a particular 
price. If the demand is over-estimated, the producers 
will realise smaller profits than they anticipated. But 
such an excess, of supply can only be temporary, because 
low profits will check production. The demand for a, 
commodity, as we have so often said, is determined by itS' 
price; raise the price of a commodity, and the quantity 
of that commodity which will, be purchased is at once 
diminished. But^ on the other hand, by sufficiently 
lowering the price, the quantity of a commodity which 
will be j)urchased may be indefinitely increased. Now, 
there is a certain average rate of profit w^hich prevails in 
a country at any particular time. Unless manufacturers 
and traders hope, on the average of years, to realise a certain^ 
rate of profit on their capital, they Avill not continue their 
business; they would rather withdraw their cajoital as 
speedily as possible, and invest it. in other undertakings. 
A constant tendency is therefore in operation which so 
regulates the price of commodities that the ordinary rate 
of profit is,, on the average of years,, given to each, class of 
producers. If the price of any commodity is more than 
sufficient to do this, the production of the commodity is 
stimulated, the supply is increased, and the price of the 
commodity must fall in order to make the demand, meet 



488 Manual of Political Eeo7iomy, 

BOOK III. tlie increased supply. But whenever the price of any 
■ — 1-J ' > commodity falls so low as to cause a particular branch of 
industry to be comparatively unremunerative, there exists 
what is commonly called over-production; such over- 
production can only be temporary, for the low prices will 
exert an influence to check the supply of the commodity, 
and the price of the commodity will soon be raised, so 
that the producers of it again receive the ordinary rate of 
profit. 
Low ^TO' It therefore appears that, however great may be the 
'fjJTti a accumulation of capital, commodities are sure not to be 
misapplica- produced SO as to be wasted; there will be always persons 
^capital hut ^^^^y to consume the commodities which are produced, if 
not to a the price at which they are sold is sufficiently low. Conse- 
pn>duction ^.^^^^'^^^J the accumulatioEL of capital, as was pointed out in 
of wealth, the last chapter, may reduce profits, but never causes a 
superfluous production of wealth. Capital may be misap- 
plied and wasted, and when a very low rate of profit pre- 
vails, there is always a great temptation, as is proved by 
every commercial crisis, to squander capital upon useless 
and unproductive schemes. People become dissatisfied 
with the small profits of legitimate trade, and therefore 
recklessly embark in any scheme that affords a prospect of 
large gain. But such a misapplication of capital resulting 
in a waste of wealth, is a very different thing from wealth 
being produced in such superfluity that it must be wasted 
for want of consumers. It is true, that the investment of 
capital in unproductive schemes is often prompted by the 
prevalence of a low rate of profit. The capital however 
need not be so invested, for it could still be employed 
productively; if it were so employed, the supply of com- 
modities would be farther increased, and profits would again 
decline. This decline in profits would be disadvantageous 
to the producers; the consumers of the commodities would 
be benefited, and the wealth of the nation would be in- 
creased to the full extent of this additional production. 



Of Over-Production or' Excess of Supply. 489 

When discussing the subject of capital in our first book, book hi. 
we assumed the most extreme case of over-production that > — 1 , ' . 
it is possible to conceive, for we supposed that capital went The ex- 
on accumulatinsc so fast, and the production of commo- ^'''^^^ ^^^^ 

. ' 1 ofover-pro- 

dities was so largely increased, that at length the labourers duction as- 
were able to obtain every thinsr which they required, either ^^y^^^ *^ 

•^ c> J i ' ^ ifie chapter 

to minister to the wants or to the enjoyments of life, on Capital- 
It may be said, that if in such a state of things capitalists ** *^'"'^^*- 
should continue to accumulate, and labourers continue to 
labour, additional wealth would be produced, which no 
one would have any desire to consume ; but such a suppo- 
sition tacitly assumes, that men have an uncontrollable 
desire to labour, and that in fact they labour for labour's 
sake. This is entirely contrary to the experience of human 
nature: men labour in order to satisfy their wants, and 
to provide themselves with the enjoyments of life. La- 
bourers would gladly shorten their hours of toil, if, in 
consequence of an increased accumulation of capital, the 
remuneration of labour should ever be so largely augment- 
ed that their wages should become sufficient to supply 
them with all the necessaries and enjoyments of life. 
It therefore appears that, upon the most extreme hypo- 
thesis, there cannot be over-production, in the sense 
conceived by Malthus, Chalmers, and Sismondi. The 
fallacies they propounded on this subject were no doubt 
due to a misinterpretation of the phenomena connected 
with the low profits which prevail in a trade when there 
has been an over-production of some particular commodity. 
Mr. J. S. Mill has aptly remarked, that any 'difference of 
opinion on the subject of over-production, involves radi- 
cally different conceptions of political economy, especially 
in its j)ractical aspect. On the one view we have only to 
consider how a sufficient production may be combined 
with the best possible distribution; but on the other, there 
is a third thing to be considered — how a market can be 
created for produce, or how production can be limited to the 



49 o Manual of Political Economy-.. 

capabilities of the market. Besides, a theory so essentially 
self-contradictory cannot intrude itself without carrying 
confusion into the very heart of the subject, and making 
it impossible even to conceive with any distinctness many 
of the more complicated economical workings of society.' 




491 



CHAPTER XV, 

ON THE RECENT GOLD DISCOVERIES. 

THE unprecedentedly large supplies of gold whicli have book hi. 
been obtained from Australia and California, during - ^^•^•^'^- , 
tbe last few years, have already produced many important The effects 
results, and if these supplies continue, a still more powerful ^f ^«cen« 
influence will no doubt be exerted upon the commercial discoveries 
condition of every country. When the intelligence that '^^^ ^^^^K 

■^ . . uncertain. 

rich deposits of gold were spread over Australia and Cali- 
fornia was confirmed by the repeated arrival of ships with 
many thousand ounces on board, the commercial mind 
of Europe became greatly excited. The wildest specula- 
tions were indulged in; financiers of great reputation 
confidently predicted, that gold would be so rapidly de- | 
predated in value, that it would in a few years be as cheap 
as silver. These predictions have not been realised, for 
although the yield of gold has continued far in excess of 
the original amount at which it was estimated, yet it is 
now a disputed point, whether up to the present time the 
value of gold has suffered any depreciation. We shall not 
hope to settle this disputed question, but we shall en- 
deavour to explain the nature of the evidence which is 
required to decide such a question. After we have done 
this, we shall proceed to remark upon some of the effects 
on prices which may be probably produced in future 
years, by the continuance of these supplies of gold, and 
we shaU conclude the chapter by tracing many most im- 
portant consequences resulting from the discovery of gold 
in Australia, which are quite independent of any influence 



492 Manual of Political Economy. 

exerted upon prices. Moreover, this is a brancli of the 
subject which has been hitherto ahnost entirely neglected. 
Only a The Australian gold fields were discovered about the 

small part y^^r 1850, and those of California two years earlier. 
Austo^alian Before that time, almost all the gold used in Europe was 
a)id Call- obtained from South America and the Ural Mountains. 
(lohl has It has been calculated, that the annual yield from all these 
been used gources combined did not exceed 6,000,000?.; and of this 

m the Eng- i f^r^rx r\r\r\l -^^ ^ ^ 

lish cur- amount about 4,000,000/. was each year sent to Hjngland. 

renc-ij. g^-j^ since the year 1850, the average yield of gold in 

Australia has been 10,000,000?., and the gold mines of 

California have been scarcely less productive. Almost all 

of the Australian gold has been sent to this country, and 

the average annual amount which we have obtained from 

California has been at least 4,000,000?. It therefore 

I appears that, during the last twelve years, Australia and 

I California have together sent to this country an amount of 

f gold exceeding by three times the amount which we pre- 

I viously obtained during a similar period from all sources 

\ combined. The question, therefore, is at once suggested, 

What has England done with this additional 150,000,000?. 

of gold? There can be no doubt that only a small portion 

of this additional gold has been coined, for the purpose 

of being employed as money in this country*. Since, 

therefore, only a small portion of the additional gold which 

has been imported into this country has been converted 

into currency, we will proceed to enquire in what manner 

the remainder has been appropriated. 

* We are able to form no correct estimate of the amotmt of gold coin 
added to our currency by examining the Mint returns. The statistics of 
the Mint show the amount of gold, silver, and copper money annually coined; 
money is, however, constantly withdrawn from circulation for the purpose of 
being re-coined, and a considerable portion of the precious metals which are 
sent from this country is exported, not in the form of bullion, but in 
specie. A glance at the Mint returns at once proves the impossibility of 
forming from them any correct opinion as to the mode in which the precious 
metals which we annually import are employed. Thus in 1847, the year 
before the gold discoveries were made, the gold coined at our Mint amount- 
ed to 5,000,000Z. ; in 1853 the amount rose to ll,000,OOOZ.; whereas it 
declined in 1858 to 1,200,000^. 



On the Recent Gold Discoveiies. 493 

The gold whicli England imports must be applied to i^ook in. 

one of the three following purposes: — • — ^ '. > 

1st. It may be employed in our arts and manufactures. Purposes to 

2nd. It may be coined into money at our Mint. "^'fj^ ^'^^ 

•^ , "^ ^ _ gold may 

3rd. It may be transmitted to foreign countries to pay have heen 
for various commodities which we have purchased from ^P^^^^^- 
them in the ordinary transactions of commerce. 

We have already alluded to the extreme difficulty of Theamount 
even approximately estimating the amount of gold which ^^.^^ ^^d 
is annually used in arts and manufactures. From the manufac- 
stamp which in this country is placed upon plate, we are St^*'^' 
enabled to ascertain that not more than 40,000^. of ofold i-aries 
plate is annually manufactured. Gold is however devoted ^ ^' 
to a great variety of purjDoses, and Mr. Jacob, a high 
authority, supposed thirty years ago that 2,000,000^. of 
gold was annually absorbed in arts and manufactures. 
The amount of gold which is so employed has no doubt 
since then greatly increased. Mr. Jacob is generally con- 
sidered to have made an exaggerated estimate. The 
difference of opinion which exists upon this point does not 
however in the least degree militate against the certainty 
of the conclusions which we wish to establish; for what- 
ever be the amount of gold which is absorbed in arts and 
manufactures, it is still nevertheless evident that the 
amount thus absorbed, though it may gradually increase, 
cannot vary greatly from year to year. When, therefore, 
the annual yield of gold was nearly quadrupled, by the 
Australian and California discoveries, only a very small 
portion of this additional gold could in the first instance 
be absorbed, by an increased demand for gold for industrial 
purposes. Unless it is assumed that gold is cheapened, 
there can be no reason why the amount of gold emjDloyed 
in arts and manufactures should be much greater in 1852 
than it was in 184^8, and yet the yield of gold increased 
during this interval more than three-fold. Hence it may 
be said, v/ith sufiQcient exactness, that almost the whole of 



494 Manual of Political Economy. 

BOOK iiL the additional gold which we have obtained from Australia 
« — '-^-^ and California must have be either coined at our Mint 

or re-exported to foreign countries. 
A larger It will be remembered, that in a previous chapter we 
is required explained the connection between the quantity of money 
ly an in- f^ circulation, and the general prices of commodities, and 
population it was then proved, that prices rise or fall in exact pro- 
m order portion to the increase or decrease in the quantity of 

that prices ^ . . , . . „ . . ^ '^ 

may not money in circulation, ii it is assumed that whilst this 
vary. increase takes place, nothing occurs to affect the general 

economy of the nation. This principle may not appear 
to be sufficiently clear, because we have employed the 
ambiguous expression, 'no change in the economy of the 
nation ; ' let us therefore explain the exact nature of the 
qualification thus introduced. It is quite evident, that if 
the population of a country should greatly increase, a 
larger quantity of money would be required to be kept 
in circulation, for there would be more buying and 
selling. If a nation had 30,000,000^. of money in cir- 
culation, when its population was 10,000,000, it would 
seem that 45,000,000?. of money ought to be in circulation 
when its population had increased to 15,000,000. If, 
however, no additional amount of money was brought into 
circulation as the population increased, and if, at the same 
time, no substitutes for money were provided, the same 
amount of money would have to do a greater amount of 
buying and selling than it did before, or, in other words, 
a smaller quantity of money will be exchanged in each 
transaction of buying and selling. The consequence of 
this must be a general decline in the price of commodities. 
Ttie rise of On the other hand, if an additional quantity of money 
prices con- gj^ould be brought into circulation far in excess of the in- 

sequent . ° 

upon an crease in the wealth or population of the country, a greater 

drculation ^^^^^i^J ^^ Hioney would be exchanged in each transaction 

of buying and selling, and general prices would rise. This 

rise in price could only be prevented, by employing the 



On the Recent Gold Discoveries. 495 

extra money in transactions which were before carried on book m, 
by some of the substitutes for money which credit provides. ^-^•^^^' . 
It is not however probable, that the rise in general prices Might be 
which would occur under the circumstances supposed J^^^^e^ */ 
would be thus prevented, although such a contingency is supplanted 
theoretically possible. We have already described the^T^y/'** 

^ ,^ . *^ , substitutes 

various substitutes for money which are now used in every /or money, 
mercantile country, and we have stated that an increasing 
proportion of the business of the country is conducted by 
cheques, and bills of exchange. If some such substitutes 
for money as these did not exist, money must be employed 
in a great number of transactions, where now it is com- 
pletely dispensed with. We have therefore said, that it is 
theoretically possible that an additional quantity of money 
might be brought into circulation, without exerting any 
effect on prices, if some of the existing substitutes for 
money were displaced; but we at the same time remarked, 
that such a contingency was extremely improbable, be- hut this is 
cause in a progressive mercantile country like our own, 5^^^"^^^*^" 
the substitutes for money, instead of being displaced, are 
each year more extensively used. For instance, a very 
short time has elapsed since many traders, such as farmers, 
paid and received everything in money. A farmer would 
pay his rent in money, and sell his wheat and sheep for 
money, but now all the large farmers in England have 
banking accounts, and they use cheques for every payment 
which exceeds a few pounds. Hence, although the quantity 
and the value of the produce which is annually bought 
and sold by the English farmers has greatly increased 
during the last few years, yet a much smaller quantity of 
money is probably kept in circulation in the agricultural 
districts, because cheques are now employed in so many 
transactions, instead of money. 

We have made these remarks, in order to show the ex- ITence it is 
treme difficulty of ascertaining the effect exerted on general J^^^H^i^e 
prices by an increase or decrease in the quantity of money the effect 



496 Manual of Political Economy. 

BOOK III. in circulation. If, for instance, tlie population and wealth 

CH. XV. q£ ^j^Q country increase, and if more money is not brought 

2iroduced into circulation, one of two things must occur: either 

oji prices 6?/ o'Qj^eral prices must decline, or some of the substitutes for 

an increase ^ ■"•,, ii-, j' i*? 

or decrease money must be employed m transactions which were 
ofthecir- previously carried on by money. If, on the other hand, 
an additional quantity of money is brought into circulation 
when there is no corresponding increase in the wealth and 
population of the country, then, again, one of two things 
must occur : either the value of gold must be depreciated 
and general prices will rise, or money must be used in 
transactions where it was not previously employed. The 
first of these contingencies, namely, a general rise in prices, 
would be almost sure to occur, because in progressive 
mercantile countries, such as our own, there is no proba- 
bility that money will be used in transactions where it was 
not previously employed, since every year a greater amount 
of business is carried on by means of the various substitutes 
for money. Hence, from the remarks which have just 
been made, the following question is suggested for solu- 
tion, in order to decide what effect the recent gold dis- 
coveries have exerted on general prices in this country. 
We cannot The question is this, Has the additional gold which has 
Ivhether the ^^^^ coined and circulated as money in this country been 
increase of in excess of the amount required for the increase which 
Teen more ^^^ Occurred during the last twelve years in the wealth 
than pro- and population of the country? If this question is 
^tolhTL' answered in the affirmative, general prices must undoubt- 
creased edly have risen. But the solution of such a question 
transac- depends on tacts w^hich can only be approximately 
iions. ascertained; for it is, in the first place, impossible to 

calculate with even any pretence to accuracy, what is the 
amount of wealth which is annually bought and sold in 
this country ; and, in the second place, if this amount could 
be contrasted with what it was twelve years since, it 
would be further necessary to ascertain how much of this 



On the Recent Gold Discoveries. 497 

wealth was actually exchanged for money, in order to be book m, 
able to decide what is the amount of money required to ^-^^^^ 
be in circulation at any particular time, so as to preserve 
uniformity in general prices. It would therefore seem 
that the method of investigation just indicated does not 
enable us to know with precision whether general prices 
have risen or fallen, during any particular epoch. 

But it may perhaps be said, If it is desired to 'kviO^Y Nor can 
anjrthing concerning a general rise or fall in prices, why ^'^ ^"'^^'^ 
not adopt a very obvious and simple method, and compare the prices 
the prices of commodities now with what they were a few aUieT^^- 
years since ? The method however, though obvious and cattse those 
simple, does not supply so conclusive a test as may ^Q^affTcted'L 
supposed, as will be seen if we try its efficiency by employ- '^^i'^y other 
ing it to discover what has been the effect on prices of J^,''^,^'''^ 
the recent gold discoveries. Directly such a comparison «/ ^ome 
is attempted, it will be found that there has been neither a 'Zhliu 
general rise nor a general fall in prices*. The price of some ^^^^'''^ ''^'^«- 
commodities has increased, whereas the price of some 
other commodities has decreased to a corresponding extent. 
For instance, during the last ten or twelve years, the 
price of meat and dairy produce has decidedly risen, 
whereas the price of manufactured goods has fallen. But, 
as has been previously stated, the rise in the price of 
meat may be fairly explained without implying that the 

* A remarkably able pamphlet by Mr. Jevons, which was published by 
Messrs. Sandford of Charing Cross in 1863, has induced me in some degree 
to modify this opinion. Mr. Jevons has made the most elaborate coinpari- 
Kon which Las ever been attempted of the changes which have taken place 
in the prices of commodities since the gold discoveries, and he certainly 
deduces results which seem to lead to the conclusion that a depreciation in 
the value of gold has already commenced. Mr. Jevons with some confidence 
affirms that this depreciation amounts to 15 per cent., but he seems to me 
to possess hardly sufficient data to make so precise an estimate ; for it should 
be always borne in mind, that a rise or fall in the prices of various commo- 
dities has been caused by a great variety of circumstances, which are quite 
independent of any change in the value of gold. Thus, to repeat an illus- 
tration to which we have frequently alluded, it cannot be doubted that 
wheat has been made cheaper by Ibreign importations, and that meat has 
become dearer, because the demand for it has become greater in consequence 
of an increase in our population. 

KK 



498 Manual of Political Econoiny. 

BOOK III. value of gold has been depreciated by the recent dis- 
. ^^'^'^- . coveries, since the increase in the quantity of meat which is 
required to meet the wants of a larger population is quite 
sufficient to account for a rise in the price of meat. 
Again, improvements in machinery and in the processes of 
manufacture have cheapened the cost of producing various 
commodities, and their price has consequently declined. 
It therefore appears that a rise in the price of some articles 
and a fall in the price of others may be due to some spe- 
cial causes, and" may occur independently of any general 
decrease or increase in the value of gold. It is therefore 
natural to expect that a comparison of general prices 
now with what they were ten or twelve years since will 
not enable us to decide with certainty whether or not 
the value of gold has been depreciated. Undoubtedly the 
depreciation cannot as yet have been very great, because 
opinions still differ as to whether a certain income, say 
100?. per annum, will now purchase as many of the 
enjoyments and necessaries of life as it did before the new 
gold was discovered. It may seem that there is yet 
another method of investigation, which will conclusively 
decide the question as to whether the value of gold has, 
or has not, been depreciated. Thus it may be said, that 
in a previous chapter of this work, the value of gold as 
well as of all other mineral produce was stated to be 
regulated by laws similar to those which determine the 
It might value of agricultural produce. If the value, or price of 
\hat^ifTold agJ^icultural produce declines, the worst land in cultivation 
had^failen will cease to return any profit, and will consequently be 
!!lv!l^^' thrown out of tillage. In the same way, if the value of 
would have mineral produce declines, the profits resulting from mining 
wot^^^ industry will be diminished, and many of the least pro- 
ductive mines will cease to be worked. It may therefore' 
be thought that many of the least productive gold mines 
must during the last few years have been relinquished if 
the value of gold has been depreciated by the discoveries 



On the Recent Gold Discoveries, 499 

in Australia and California. It does not, however, appear book til 
that gold mines in other parts of the world have been thus ^^'^ ^:_ 
relinquished, because the yield of gold from South America 
and other sources of supply is as great now as it was 
previous to the discovery of the Australian gold fields. 
This fact therefore seems to support the opinion that the 
value of gold has not, as yet, been depreciated to any 
considerable extent. 

The evidence, however, which is derived from the con- This is not 
sideration just mentioned, is not as conclusive as at first Hcame^^' 
sight it may appear to be. We throw out this suggestion miningpro- 
in order to caution our readers, because it must be l^omegf^J^y ^^^j 
in mind that mining industry, and especially gold mining, partake of 

• n T , . ^ i • , 1 • 1 , A i^^6 nature 

IS lar more speculative and uncertain than agriculture, ^ofa lot- 
decline in the price of agricultural produce almost im- ^^^y- 
mediately affects the rent which farmers will consent to 
pay. Each farmer can very approximately calculate- the 
profit which he shall be able to realise, and he will refuse 
to rent his farm, unless he considers that he shall be able 
to obtain an adequate return for his labour and his capital. 
No such calculation can, however, be made with regard 
to the profits which a mine is likely to yield. It often 
happens that the discovery of a new lode may in a few 
months vastly increase the profits and value of a mine. 
Even in our own country it has frequently happened that 
a copper or tin mine has in a short time increased in value 
a hundred fold. Mining therefore resembles a lottery ; 
those consequently who are engaged in mining industry 
do not, or cannot, calculate the profits which are likely 
to be realised. The chance of obtaining a great prize is ^icy are 
the real motive which prompts mining enterprise. Thus, ^//g,f ^/^^ 
again and again has it been stated that the copper and average 
tin mines of Cornwall do not, on the aggregate, return a ^xtreme/u 
profit of two per cent, on the capital which is expended loio. 
upon them. This striking statistical fact exerts no in- 
fluence whatever, and people will continue to embark 

KK2 



500 Manual of Political Economy. 

BOOK HI. their capital in this unremunerative industry, as long as 
' — ^v— ^ they observe that a mine here and there has been so 
successful that 100^. originally invested in it would realise 
an annual income of many hundreds a year. People in a 
similar way are attracted to the gold fields by the intelli- 
gence of great and successful 'finds/ and they seldom calcu- 
late what is the average profit realised by each person em- 
ployed upon a gold field. It therefore appears that the 
supply of gold may not immediately be much affected by a 
slight depreciation in its value ; a continuance of the depre- 
ciation must, however, after a time diminish the supply. 
Hence a depreciation in the value of gold is, as it were, 
spontaneously retarded, because a depreciation in value 
exerts a tendency to decrease the supply of gold, and a 
diminution in the supply at the same time exerts a ten- 
dency to increase its value. 
The large The fact that the large additional supplies of gold 
mMr7- have, as yet, caused no marked depreciation in its value, 
ceived have enables US to account for a most important result which has 
disarrange- been undoubtedly produced by these discoveries. We have 
ment of the already stated that any sudden variation in the value of 

finances of •; . 

'the country, the suDstance which is chosen as money must prove most 
disastrous to a mercantile nation. Our readers will clearly 
perceive this, if they reflect for a moment upon some of 
the consequences which would ensue, if the value of gold 
should, in a few years, increase fifty per cent. Every fixec^ 
money payment would then be increased fifty per cent., 
since the prices of all commodities would be reduced fifty 
per cent.; and therefore 150 sacks of wheat could only sell 
for the same amount of money as 100 sacks sold for 
before. Those, therefore, who had to pay fixed money 
rents, would have their rents virtually raised fifty per 
cent., because fifty per cent, more produce must be sold 
to obtain the requisite amount of money to pay the rent. 
Again, the burden of the national debt would be increased 
fifty per cent. ; because, if the interest on the debt was 



On the Recent Gold Discoveries. 501 

.30,000,000/., this amount of money would represent tlie '^o'^k m. 
same quantity of wealth as 45,000,000/. did before the • — -1^ — '-^ 
value of gold was depreciated. The whole monetary 
arrangements of the country would, in fact, be thrown into 
a state of confusion, since those who had fixed money 
payments to receive would be enriched as much as those 
would be impoverished who had to make these payments. 
Now, there can be no doubt that the value of gold would 
have been suddenly increased, and the disastrous con- 
sequence just mentioned would have consequently ensued, 
if England had not obtained since the year 18.50 a large 
additional supply of gold. It is a remarkable coincidence, Tim is 
that the time when the gold discoveries were made '\^'d<'^Y(i^^^tliat 
the commencement of a new era in the commerce oHhegold 
this country; the Navigation Laws were then repealed, -comc?"(/ed 
and this measure completed the great free-trade policy of ^^^'^ ^^^ 
Sir Robert Peel. Our commerce and trade, released from ^g^^ of a 
the trammels of protective duties, at once showed a most '^^'^ ^(^ *^^ 
extraordinary development. Our exports in twelve years, 
from 1848-60, advanced from 60,000,000/. to 135,000,000/., 
and our imports exhibit a corresponding increase. In 
184)7 we imported about 500,000,000 lbs. of cotton, and 
55,000,000 lbs. of tea, and in 1856 we imported more than 
1,000,000,000 lbs. of cotton, and nearly 90,000,000 lbs. of 
tea. This expansion of our trade and commerce was as 
sudden as it was great; for it is an instructive fact, that 
the trade of this country seemed to be in a stationary 
state for several years previous to the introduction of free 
trade. Our exports and imports had, since the conclu- 
sion of the war in 1815, shown a progressive increase; 
but about the year 1838, until the establishment of free 
trade, they remained almost stationary. Now, it is quite 
evident that such a sudden development of trade and 
commerce Avould require a larger amount of money to 
be brought into circulation; for, as the wealth of the 
country increased, a greater amount of wealth would be 



commerce. 



502 Manual of Political Economy. 

BOOK III. each year bought and sold for money, more money would 
. — V— ^ ^Iso be required because the population was more nu- 
merous. Again, more money was wanted in order to pay 
the wages of the labourers; for our exports could not 
advance from 60,000,000^. to 135,000,000^. without the 
wage-fund of the country being enormously increased. It 
therefore appears, that the sudden development of our 
trade and commerce about the year 1850, created a de- 
mand for a greater quantity of money to be brought into 
circulation. 
// the gold If no new supplies of gold had been forthcoming, this 
clLcovereT ^^Iditional demand for gold must have inevitably caused a 
the addi- sudden rise in its value. The extent of this rise might 

tional de- i -\ •iiii.i ii 

mandfor '^^'^^ been very considerable, and those consequences would 
moneymu§t\\Q^YQ ensued which have been already described. The 

have raised • • J_^ i fiii-i iti i 

2:)Tlces. increase m the value oi gold which would have occurred, 

can be best understood by reflecting on the large quantities 

of gold which have been poured into this country without 

producing any marked depreciation in its value. It 

therefore may be regarded as conclusively proved that the 

gold discoveries were made at a most opportune time, 

and that they averted a most serious evil; for, if we had 

been left to the old sources of supply for obtaining gold, 

England's commerce could not have expanded as it has 

during the last few years without a large and sudden fall 

in general prices. 

A large We have next to investigate the manner in which the 

foldTas ^^^'g® quantity of gold has been employed which England 

been re-ex- has re-exported to foreign countries. An examination of 

^India mid ^^^® Board of Trade returns at once suggests an answer to 

China. this enquiry ; for it will be perceived that, since the year 

1850, there has been an extraordinary export of the 

precious metals to India and China. The average annual 

amount thus exported has certainly been not less than 

12,000,000^., and yet a few years previously to this, the 

amount sent was comparatively insignificant. The causes 



On the Recent Gold Discoveries. 503 

whicli have induced this large export of the precious metals book in. 
to the East are well worthy of explanation. The increase . ^"•^^^•, 
in the trade of this country which has just been described, 
is exhibited in a very striking manner by the quantity of 
tea and silk which we import from China. In 184^7 we 
purchased only 55,000,000 lbs. of tea from China, whereas 
we now import nearly 100,000,000 lbs. This increased 
consumption of tea which has taken place since the intro- 
duction of free trade satisfactorily proves the benefits 
which have been derived from that policy ; for there is no 
luxury so much prized by our labouring classes as tea, 
and therefore the consumption of tea could not have been 
nearly doubled unless our labouring poor had become far 
more prosperous. About the year 1850, another circum- 
stance happened which powerfully affected our Chinese 
trade, for then the silk crop in Europe first began to show 
signs of failure. China was at once resorted to, and since 
that time large quantities of raw silk have been imported 
from that country. In the year 1855 we imported more 
than 4,000,000 lbs. of silk from China, whereas a short 
time previously the importation had been insignificant. 
These figures are sufficient to demonstrate the enormous 
increase which has occurred during the last few years in 
the money value of our imports from China. But our 
exports to that country do not advance in a corresponding 
degree; the Chinese possess all the prejudices which result 
from an isolation of 2,000 years. Although the industry 
of this people is so remarkable that they seem capable of 
supplying Europe with any quantity of tea and silk which 
may be required, yet the Chinese will not accept European China has 
commodities in exchange for their produce. For great as ^'^/"^<^^ ^^ 
is the increase of our imports from China, yet our exports commodl- 
to that country were less in 1855 than they were in 1844. ^^^sthavthe 
Durmg the three years 1844-5-6, our exports to China metals. 
averaged rather more than 2,000,000?. In 1853 they 
declined to 1,700,000?., and in the next two years to 



504 



Manual of Political Economy, 



In India 
gold and 
silver have 
ieen sent 
out in con- 
sequence 
of the great 
outlay of 
English 
capital. 



A [though 
it is chiefly 
silver which 
ha,s been 
sent, the 
place filled 
hy the silver 
in Europe 
has to be 
filled up by 
gold. 



1,000,000Z. The result of this is, that what is popularly 
called the balance of trade is largely against England and 
in favour of China. In order to adjust this balance of 
trade, we are compelled, as has been already stated, 
annually to send many million pounds sterling of the 
precious metals to China. 

Again, with regard to India, the large public w^orks 
which have been carried out in that country have rendered 
it necessary that a considerable amount of the precious 
metals should annually be sent there from Europe. It has 
for instance been calculated that, in seven years 43,000,000?. 
of English capital has been subscribed for Indian railways ; 
a portion of this was of course spent in England for plant 
and materials, but a large portion of the amount was sent 
in the form of precious metals to India, for the purpose of 
paying those employed in the construction of the railways. 
The causes which have been here stated, and others of 
minor importance, which might be enumeraued, are quite 
sufficient to explain why, during the last few years, an 
amount of the precious metals equivalent, on the average, 
to 12,000,000il. has been annually exported to India and 
China. 

It may, however, be urged, that these facts do not prove 
that much of the Australian and Californian gold has been 
absorbed by India and China; because it is silver, and not 
gold, which has been chiefly sent to those countries. As 
far, however, as the absorption of gold is concerned, it 
makes little difference whether it is this metal, or silver, 
which is sent to the East ; for the large quantities of silver 
which have been exported to the East, must have been 
principally obtained from the silver coinage of various 
countries ; in fact, it is well known, that the silver currency 
of France has supplied a considerable portion of the silver 
which has been thus exported. A few years ago, a very 
large number of five-franc pieces were in circulation in 
France; a large amount of this particular kind of money 



On the Recent Gold Discoveries, 505 

had been hoarded and kept concealed by the peasantry of book hi. 
remote districts. The demand for silver to be sent to the s— :^1, .; , 
East has caused a very large number of these five-franc 
pieces to be bought up, for the purpose of being melted 
down. Their place in the French currency has been 
occupied by gold coin; and therefore, although silver is 
sent to the East, yet it may be considered that gold is 
really absorbed, if this silver, which is thus sent, has to be 
replaced by gold of a corresponding value. 

Although the" greater part of the new supplies of gold The future 
which have not been retained by England, have been ^^^.^qF' 
either exported to the East, or have replaced the silver theprecioys 

-,•■,-, ^ iiiii ^ L- .' i metals will 

which has been exported to the same destmation, yet some ^g^g^^^z 
of the Australian and Californian gold has been absorbed by w^'^ t^« 
other countries. For instance, these countries themselves, g^^^ ^^^;^g 
as well as many others, have been rapidly advancing in ^«s?. 
population and wealth, and their growing trade conse- 
quently requires a greater amount of money to be brought 
into circulation. But as long as 12,000,000/. of the 
precious metals are annually sent to the East, we must 
regard this as the principal source for the absorption of 
the new supplies of gold. Hence it would appear, that 
the future position of our trade with India and China must 
mainly determine the influence which is yet destined to 
be exerted on prices by the recent gold discoveries. The 
present position of our trade with China is so anomalous, 
that it would be hazardous to make any prediction re- 
garding it. Who, for instance, can tell how long the balance 
of trade will be against our ow^n country, and in favour of 
China? Perhaps the Chinese are anxious to exchange their 
tea and silk for gold and silver; because the unfortunate 
civil war which is raging there, makes property insecure, 
and the precious metals can be easily concealed and 
hoarded. The Chinese, moreover, are a remarkably shrewd 
people, and they are ever ready to avail themselves of any 
chance of making a pecuniary gain. What, tlien, is more 



50 6 Manual of Political Economy, 

likely tlian that they may some day recognise the advan- 
tage of exchanging their tea and silk, not for the precious 
metals, but for some commodities of European manufac- 
ture? The loss which the Chinese suffer from the present 
method of carrying on trade, is very apparent; for the 
precious metals are not intrinsically useful, and 1,000,000?. 
expended in England would purchase commodities of far 
greater use and value, than could be purchased by the same 
amount of money, if it was expended in China. If the 
Chinese should become large importers of European pro- 
ducts, Europe would no longer be obliged to send the 
precious metals to that country, in order to adjust the 
balance of trade. There would consequently cease to be 
any demand for a considerable portion of the 12,000,000?. 
of gold and silver which is now annually sent from England 
to the East. 
Ifthejloio This great stream of the precious metals being, as it 
fredous were, turned back upon England, would no doubt cause 
7netals to the valuo of gold to be rapidly depreciated, and the con- 
were ^^^ sequence would be a general rise in prices. We do not 
checked, predict this as a certain, but simply as a possible, result ; it 
^wwdd soon ought not, however, to be forgotten, that it is a contingency 
rise in which may at any time occur in the course of a few years, 
ng an . ^^^ ^^ therefore think that people would be prudent, if 
they made some preparations to meet it. The practical 
importance of taking such precautions has not, however, 
as yet been recognised in this country ; for instance, 
fathers who wish to leave a comfortable provision for un- 
married daughters, frequently settle upon them a certain 
fixed money income, arising from an investment in the 
funds, and generally the money is settled upon them in 
such a way that the investment cannot be changed. We 
have, however, stated reasons which seem to show, that 
such a provision is not so free from all risk as it is intended 
to be. For if a certain contingency should occur (such, 
for instance, as an alteration in the present condition of 



On the Recent Gold Discoveries. 507 



the Eastern trade, or the discovery of still richer deposits book hi. 
of the precious metals), the value of these metals may ^^^;,^Il 
be so depreciated that an income of 200^. per annum would 
be worth no more than 100?. is now. If we carefully weigh 
all the facts bearing upon the subject, we are inclined to 
believe that the chances are rather against, than in favour 
of, such a depreciation; but still its occurrence is by no 
means improbable, and we therefore think it ought to 
be considered in all transactions which involve the con- 
tinuance of fixed money payments during a considerable 
time. 

We will give an example to show how this possible de- Means hj 
preciation in the value of gold might be guarded against. "^J^lf^^ /i 
Suppose a person wished permanently to invest 10,000?. ly a depre- 
in railway property; this sum invested in debentures ^^^^J^*^^ ^-^^^ 
would give him a uniform income of about 400?. a year, ticuiar 
If, however, the value of gold became depreciated twenty- I'^^aZidtd. 
five per cent., he would virtually lose twenty-five per 
cent, of his income, although its nominal amount would 
remain unaltered. Let it, however, be assumed, that the 
10,000?. was expended not in debentures, but in stock. A 
debenture only gives a man a claim upon a railway company 
for a certain annual money payment, but the possessor- of 
railway stock is part owner of the railway itself; if, therefore, 
the value of gold is depreciated, the money value of the rail- 
way will, cceteris paribus, increase in a corresponding degree ; 
and, therefore, the money value of the stock which is pos- 
sessed by the individual, will also be increased to the same 
extent. Hence, property thus invested is secure against any 
loss arising from a depreciation in the value of gold. An 
income derived from land is also similarly secured against 
any loss arising from this cause ; but all securities, such as 
our own funds, foreign stocks, &c., in which a fixed rate 
of interest is paid, diminish in value in exact proportion 
to the depreciation in the value of gold. It must not, 
however, be supposed, that this depreciation would be 



5o8 Manual of Political Economy. 

BOOK III. shown by a reduction in the price of the securities; their 
v_ff:^fll^ price would not be in any Avay affected. If gold were 
depreciated one half, 3?. would be worth no more than 
1^. 10s. is now, and a fundholder's property would conse- 
quently be depreciated one half, although the price of funds 
might remain unaltered. It is moreover evident, that the 
tax-payers would be relieved of one half the burden of the 
national debt, if the fundholders lost one half their in- 
come by a depreciation in the value of gold. 
The fund- Some have considered, that if the fundholders' property 
holders gJiould be depreciated in the manner iust described, 

would have J- _ _ , ^ _ ' 

710 claim for they would have a legitimate claim for compensation from 
limfcm^' ^^^^ nation. Such a claim might be urged with apparent 
the govern- reason, if gold had been depreciated in value so suddenly 
'^^^^^' that it was impossible for any one to take timely warning. 

The claim, however, under present circumstances, would 
be entirely indefensible ; for the possibility of a depreciation 
in the value of gold has been discussed and predicted for 
the last twelve years. Some authorities affirm, that the 
depreciation has already commenced ; whereas other autho- 
rities of equal reputation as confidently assert, that the 
time may be still indefinitely distant, when the value of 
gold will become depreciated. Hence every investor has 
ample time to take warning, and no one ought for one 
moment to be encouraged to believe that he would have 
the slightest claim for compensation, if his property should 
become depreciated by a fall in the value of gold. 
Influence of We have now considered the influence that has been, and 
discoveries ^^ J^^ likely to be, exerted on prices, by the recent gold dis- 
upon the ex- coveries ; it therefore only remains to describe the effects 
Countries, which these discoveries have produced upon the countries 
in which they have been made. We will, for the sake of 
convenience, chiefly confine our attention to a description 
of the economic progress of Australia; for at the time of 
the gold discoveries, the commercial condition of Australia 
so much resembled that of California, that the remarks 



On the Recent Gold Discoveries. 509 

which we may make with regard to the one country, will book iir. 
equally apply to the other -^?Il_. 

It has been previously stated, that of the three requisites Australia 
of production — viz. land, labour, and capital — a younsf "^"f*^^/^". ., 
colony such as Australia possesses the first in an eminent in land, but 
degree ; for long previous to the gold discoveries, the great ^^f*^ ^^ 
natural resources 01 Australia were known, but it was impos- capital. 
sible, in consequence of a deficiency in the supply of labour, 
to make these resources adequately productive. Her pas- 
tures, for instance, grazed enormous flocks of sheep; the 
population of the colony was, however, so small that these 
sheep were worthless except for their wool. An abundance 
of fertile land could be purchased at almost a nominal price ; 
but previously to 1848, comparatively very few emigrants 
went to Australia ; consequently two of the requisities of The gold 
production — namely, capital and labour — were wanting, ^JJ^ovmes 
and tne progress of the colony was extremely slow. But labour and 
directly it became known that rich deposits of gold had ^^^P^^^^> 
been discovered, thousands of emigrants were immediately 
attracted to Australia. This additional supply of labour 
exerted no immediate effect upon the development of 
the other resources of the country; in fact, her general 
industry was, in the first instance, seriously interfered 
with, for a great proportion of the labourers of the colony 
were attracted to the gold fields. Shepherds left their 
flocks, and every class of the community for a time re- 
linquished their ordinary avocations. The whole economy 
of the nation was quickly thrown into a state of confusion ; 
it was, however, soon discovered, that the average profits 
realised in the gold fields were not so great as the profits 
which could be obtained from many other employments. 
A considerable amount of labour was therefore rapidly 
withdrawn from the gold diggings, and returned to agri- 
culture and other industrial pursuits. There was, more- 
over, a large population at the gold fields, whose wants had 
to be supplied. This new demand stimulated the industry, 



510 Manual of Political Economy, 

BOOK III. increased tlie wealth of tlie colony, and, as an example, 

CH. XV. . . 

> — 'J^—^ ifc may be stated, that meat which before could only be 
sold at a nominal price, soon realised Zd. and 4d a pound 
in the Melbourne market. Wealth was rapidly made, and 
a large amount of capital was saved. The high rate of 
profit which prevailed in the country, attracted capital from 
England ; Australia in this way suddenly obtained the two 
remaining requisites of production — namely, capital, and 
labour — and she consequently advanced in commercial 
prosperity with wonderful rapidity. 
although It therefore appears that the gold discoveries have ex- 
oMin ^^^®^ ^ special influence in promoting the industrial 
gold mining progress of Australia. We have, however, been anxious 
'ceDtionallv ^^ explain, that the benefit thus conferred is not due to 
high. the realisation of an exceptionally high rate of profit in 
gold-digging. No doubt some of the Australian gold- 
diggers have made great gains; but, when the average 
earnings are estimated, it is found, that gold-digging is 
not more remunerative than other branches of industry. 
For instance, when agricultural wages were 405. or 50s. 
a week in Australia, it was calculated that the average 
' earnings of those engaged in many of the gold fields did 
not exceed 855. a week. But the discovery of gold con- 
fers a special benefit upon a colony; because no other 
circumstance exerts so powerful an influence in attracting 
emigrants, and the reason of this is very obvious. 
Gold In the first place it may be remarked, that in a hazard- 

'pTrtakes 0/ ous speculation such as gold-digging, the instances of great 
the nature succoss are brought into far greater prominence than the 
andisthere- corresponding cases of failure. The same feelings which 
fore very induce people eagerly to enter a lottery, attract them to an 
' employment which offers chances of great gain. It must 
also be borne in mind, that gold-digging is not impeded 
by those obstacles which, in a young colony, retard the 
progress of almost every other kind of industry. Land 
cannot, for instance, be profitably cultivated in a young 



On the Recent Gold Discoveries. 511 

colony, until roads have been made, and until there is a book m. 
town population in the colony itself to purchase the produce ^£5:J1L^ 
which may be grown. Manufacturing industry cannot be 
carried on with success, because labour is so dear. More- 
over, all mining operations except gold-digging, require a 
great expenditure of labour and capital. Expensive ma- 
chinery has to be constructed, and the produce raised is 
bulky, and therefore the cost of conveying it to market is 
extremely great. Australia is, no doubt, very rich in other 
minerals besides gold; many of her copper mines are far 
more productive than those which yield large profits in 
Cornwall; but one single fact will show the difficulty of 
working an Australian mine with advantage. The price 
charged for bringing the ore from an Australian mine call- 
ed the North Rhine Copper Mine, to port, is 51. a ton, 
whereas the average price which the smelters pay for 
English copper ore does not exceed this amount. 

Gold mining has, however, to contend with no such ^chilst U 
difficulties. The Australian gold-digger requires little ^^^^'^^^ 
capital except a few simple tools, and sufficient money to cajpital. 
pay his passage out ; and therefore, in embarking in this 
industry, he risks little more than a certain amount of time 
and labour. It therefore need not be a matter of surprise, 
that the gold discoveries immediately attracted thousands 
of emigrants to Australia; the labour which she required 
was thus supplied, and her future progress was conse- 
quently insured. 



BOOK lY. 
TAXATION. 



LL 



515 



CHAPTER I. 

ON THE GENERAL PBINCIPLES OF TAXATION. 

T is customary for writers on political economy to dis- ^^^^ jy^ 
cuss taxation as a part of the separate division of the ch. i. 
science which has been termed by Mr. Mill, 'the influence ^ ,. . 

. . -^ . ' Taxation is 

of government. iN ow, it is no doubt quite true, that every generally 
act which is done by a government, every law which is ^'^^^^^^^^ 

Cv/iLt'O/ Lite 

brought into operation, and every measure which is en- headofthe 
acted, exerts, either directly or indirectly, some influence jf^Q^^^ ^{ 
on the economy and wealth of the nation. It might there- ment.' 
fore appear that every law and every act of Parliament Reasons for 
might be appropriately discussed in a treatise on political this branch 
economy. But if such a course were adopted, the rano^e ^f f^^ ^^" 
of our subject would be practically unlimited. We there- 
fore think it quite necessary that some restriction should 
be placed upon the scope of this part of our enquiry; a 
convenient boundary line will be drawn, if we confine our 
investigations to measures, the specific object of which is 
to obtain money, which the government either spends 
itself, or directs to be expended by others. It is manifest 
that such measures are included in the term taxation, 
meaning by the word, local as well as general taxation; for 
taxation has no other object in view except to obtain 
money. The taxes, when collected, may be devoted to any 
purposes which the government may direct; but a person 
is never made to pay a tax, in order that some subsidiary 
end may be attained. 

As an example it may be mentioned, that a tax on spirits Taxes may 

LL2 



5 1 6 Manual of Political Economy. 

raises their price ; the consumption of an intoxicating bever- 
age is thus discouraged, and the tax may be therefore said 
rtrodMce ^0 promote temperance. But anxious as our government 
various ^n^j be to prevent drunkenness, the tax on spirits is im- 
ichicii we posed for the sole purpose of obtaining revenue. It is, of 
onhj con- course, fortunate if the tax effects another subsidiary object, 
which in- ^ud improves the morality of the people. But if the 
fluence the revenue which is raised by the spirit-duties should not be 

production, ■ '' . ■,■,•,' ^ n j_ • • 

disiribu- Wanted, no one but a fanatic would thmk oi retammg 
tiov^, and these duties merely for the purpose of discouraging 

cxchanoe of <— > <— » 

wealth. drunkenness. Even if such a proposition were seriously 
entertained, it would involve considerations which would 
belong not to the science of political economy, but to 
the general science of ethics. Political economy has simply 
to explain what will be the influence which will be exerted 
by any particular measure upon the production, the distri- 
bution, and the exchange of wealth; and this science is 
unwarrantably trespassing upon the domains of other 
sciences, if it attempts to decide whether a particular 
measure may be right or wrong. An error of investigation 
is therefore committed, if political economy is ever per- 
mitted, in the slightest degree, to clash with the precepts 
of ethics or morality. We therefore think it advisable to 
avoid discussing, in a treatise on political economy, thosej 
acts of a government which are intended to effect some 
object which is not directly concerned, either with the 
production, the distribution, or the exchange of wealth, 
but which may, nevertheless, at the same time exert some 
influence upon the general economy of the nation. We 
Our en- obtain several advantages by adopting this course. 
thmlimit- ^^ ^^Jj ^^^ ^^^ ^^^st place, be remarked, that a necessary 
ed, so as to limitation is thus put upon the scope of our enquiries ; and, 
consid^ra- secondly, WO avoid treating subjects in a manner which is 
tions necessarily imperfect; because a full discussion of them 

PiMical would involve considerations foreign to political economy. 
Economy. For instance, improvements in the laws of inheritance^ of 



Oil the general Principles of Taxation, 517 



partnership, and of bankruptcy, may produce some very book iv. 

important effects on the commerce and trade of the country. « IJ. — > 

But any special law-reform involves so many other con- 
siderations besides those which are regarded as economic, 
that a separate treatise would be required properly to 
expound and defend the change which may be proposed. 
Thus the laws of inheritance cannot be discussed without 
the preliminary question being solved, whether the rights 
of primogeniture should or should not be respected, and, in 
order to solve this question, an appeal must be made to 
history, and to various other branches of knowledge. 
Again, the restrictions which are imposed by government 
upon railway companies, are intended to protect the lives 
and to preserve the comfort of the passengers ; whether a 
government ought to concern itself with such objects, 
would be an appropriate topic for discussion in a treatise 
on the province of government. The regulations, however, 
which a state enforces upon a railway company, produce 
certain economic results, and these results might of course 
be investigated on the principles of political economy. 
But we here avoid discussing such a subject; because, in 
attempting it, considerations which belong to political 
economy would only occupy a subordinate position, com- 
pared with those considerations which pertain to other 
departments of knowledge. The principles of political 
economy cannot therefore be deduced from investigating 
such subjects as these, although they may supply instruc- 
tive economic problems, which the student may with 
advantage endeavour to solve, in order to familiarise 
himself with the principles of the science. We, therefore, 
trust that enough has been stated to justify us in limiting 
the present portion of this treatise to an enquiry into those 
questions which relate to taxation. ^ 

T • • T 1 -1 1 • J. Govern- 

It IS evident that a government cannot possibly exist, me)its are 
unless it possesses a revenue ; its laws, for instance, be- compelled 
come a dead letter, unless the penalties which the law taxes. 



5iS Manual of Political. Economy.. 

BOOK IV. sanctions are enforced on those who disobey. The people 
v_^^^;i:_^ who enforce these penalties, are servants of the State, and 
they therefore require some remuneration for the duties 
which they perform. Hence the State must possess a 
revenue, in order to pay its various agents and servants. 
This revenue may be obtained by rapine and pillage, 
but if such means are resorted to, the revenue is not 
said to be raised by taxation; for the signification which 
is attached to this word implies, that the right to levy 
a tax is given by law, and that the law not only enacts 
by what classes of the community the tax should be paid, 
Are there ^^^ ^^^ specially states the penalty which any one Avili 
any princi- incur, if he refuses to pay the tax. The question, there- 
%dlUnable ^^^'^' ^^^7 ^® ^^ oi[i.QQ Suggested, Are there any principles 
xis to decide which will enable us to decide whether any particular tax 
justice? ^^ J^^^ ^^ unjust, defensible or indefensible? Nov>^ Adam 
Adam Smith Considered, that all the principles of taxation might 
Canons of ^® deduced from the four following rules, or precepts. 
Taxation, which, since his day, have become almost classical; so 
much so, that scarcely any one has dared to dispute them.- 
Tliese four rules, which have been termed canons of tax- 
ation, shall be described in Adam Smith's own words. 
Taxes ' 1st. The subjects of every State ought to contribute to 

should he in ^l-^Q Support of the government, as nearly as possible in 

proportion ■•■/ , o ' J r 

to the proportion to their respective abilities ; that is, in pro- 
the^taxld po^^^io^ to the revenue which they respectively enjo}^ 
under the protection of the State. In the observation or 
neglect of this maxim consists, what is called the equality, 
or inequality of taxation.' 
Tliqj '2nd. The tax which each individual is bound to pay, 

^certain ^ ought to be certain, and not arbitrary. The time of pay- 
ment, the manner of payment, the quantity to be paid, 
ought all to be clear and plain to the contributor, and to 
every other person. Where it is otherwise, every person 
subject to the tax is put, more or less, in the power of the 
tax-gatherer, who can either aggravate the tax upon any 



On the general Principles of Taxation. 519 

obnoxious contributor, or extort by the terror of such ^^ok tv. 

CH. I. 

aggravation, some present or perquisite to himself. The J ' 

uncertainty of taxation encourages the insolence, and 
favours the corruption of an order of men who are naturally 
unpopular, even when they are neither insolent nor cor- 
rupt. The certainty of what each individual ought to pay 
is, in taxation, a matter of so great importance, that a very 
considerable degree of inequality, as appears I believe from 
the experience of all nations, is not near so great an evil, 
as a very small degree of uncertainty.' 

'3rd. Every tax ought to be levied at the time, or in They 
the manner, in which it is most likely to be convenient for.^gJJ-^^ ^^^ 
the contributor to pay it. A tax upon the rent of land, the time 
or of houses, payable at the same time at which such rents ^^-g^^^ ^^ ^/^^ 
are usually paid, is levied at a time when it is most \\ke\j taxed. 
to be convenient for the contributor to pay ; or when he 
is most likely to have vv^herewithal to pay. Taxes upon 
such consumable goods as are articles of luxury, are all 
finally paid by the consumer, and generally in a manner 
that is very convenient to him. He pays them by little 
and little, as he has occasion to buy the goods. As he is 
at liberty too, either to buy or not to buy as he pleases, it 
must be his own fault if he ever suffers any considerable 
inconvenience from such taxes.' 

'4th. Every tax ought to be so contributed as both to They 
take out and keep out of the pockets of the people as little ^^ ^ -^^^^ ^,^ 
as possible over and above what it brings into the public possible he- 
treasury of the State. A tax may either take, or keep out amount 
of the pockets of the people, a great deal more than it whichcomc^ 
brings into the public treasury, in the four following ways, treasury. 
1st. The levying of it may require a great number of 
officers, whose salaries may eat up the greater part of the 
produce of the tax, and whose perquisites may impose 
another additional tax upon the people. 2nd. It may 
divert a portion of the labour and capital of the com- 
munity from a more to a less productive employment. . 



520 . Manual of Political Economy, 

8rd. By the forfeitures and other penalties which those un- 
fortunate individuals incur, who attempt unsuccessfully to 
evade the tax, it may frequently ruin them, and thereby 
put an end to the benefit which the community might 
have derived from the employment of their capitals. An 
injudicious tax offers a great temptation to smuggling. 
4th. By subjecting the people to the frequent visits, and 
the odious examination of the tax-gatherers, it may expose 
them to much unnecessary trouble, vexation, and oppression.' 
Summary In order to assist the reader's recollection, these four 
four rules, ^'^les or principles of taxation may be briefly described 
as follows : — 

1st. Taxation should possess equality. 
2nd. There should be no uncertainty with regard to the 
amount to be levied. 

3rd. The tax should be levied at the most convenient 
time, and in the most convenient manner. 

4th. The State ought to obtain as much as possible of the 
whole amount which is really levied from the tax-payer. 
The truth The importance of the last three of these four rules, 
^reeis"^ after the remarks which have been made upon them by 
indisput' Adam Smith, will be so generally admitted, that we need 
not here farther dwell upon them; they will receive 
additional illustration, when we proceed to discuss various 
special taxes. It is, however, very necessary, that the first 
of these four principles should be very clearly stated; we 
will therefore endeavour to explain what is really meant by 
equality of taxation, and we will also enquire as to the best 
mode of securing such equality. 
Equality ^ Equality of taxation is one of those expressions which, 
isaterm^ although in constant popular use, cannot, without great 
frtfia23a6Zeo/ difficulty, be accurately defined. Some people seem to 
ejitit ion. -^^^ \^ sufficient to state, that equality of taxation is se- 
cured when every person in a community is taxed according 
to his means; but to tax a person according to his means, 
is an expression which does not convey a clearer conception 



On the general Principles of Taxation, 521 

than equality of taxation. At any rate, the precept that book iv. 
people should be taxed according to their means, would give . ^" j ^- . 
the statesman as little assistance in framing a just system 
of taxation as if he were told to obey the maxim, that 
equality of taxation must be secured; for insuperable 
difficulties at once suggest themselves, if any attempt is 
made to decide whether one person's means are, or are not, 
equal to another's. A and B, we will suppose, are i\NO Difficulty of 
land-owners ; each of them possessino^ a freehold estate V/^^7"^^"''^ 
worth 1,000Z. a year. A is a bachelor, and never intends ^^ZzecZ fo 
to marry; B has ten children, besides a great number of^™^^^^ 
poor relations depending upon him. Now, unless the hachelors. 
signification of words was severely strained, it could not 
be maintained that B's means were equal to those of A; 
and yet no system of taxation which has ever been pro- 
posed, would exempt B from a tax which A was bound to 
pay, simply on the ground that B had a large family, and 
A had no children. In fact, under every system of taxation 
which prevails in any country at the present time, B would 
pay a greater instead of a smaller amount in taxes than A ; 
for B, having a larger establishment than A, would pur- 
chase a greater amount of the commodities which are taxed. 
If, for example, these two individuals lived in our own 
country, B, on account of his large family, would be sure 
to purchase more tea and sugar than A, and probably 
also, more beer, wine, and spirits ; B would also require a 
larger house than A, and a greater amount of local taxation 
would consequently be levied upon him. It, therefore, 
appears, with regard to those taxes which are levied upon 
commodities, that no attempt can be made so to adjust them 
that each individual shall be taxed in proportion to his 
means; and, consequently, if taking an individual in 
jDroportion to his means is to be the test of equality of tax- 
ation, inequality seems to be inseparably associated with 
the great majority of taxes that are imposed. 

But it may, perhaps, be said, that if taxes on commodities 



52 2 '. Manual of Political Economy, 

BOOK IV. exert upon different individuals such an unequal amount 
v_;_L_/ of pressure as that which has been described, it then 
The un- becomes all the more important, that equality of taxation 

eqvalpres- should be restored by a proper adjustment of an income- 
sure of . . 
taxes on tax. We shall presently discuss the income-tax in detail. 
commodi- j^ ^^^n j^g YievQ only necessary to state, that no plan of 

ties cannot , . , . . 

he redressed ley jmg the income-tax which has ever been proposed 

hy anm- -^^q^^ have the slightest effect in causinof the two indivi- 
come-tax. ° ® , 

duals, A and B, whom we have above described, to be taxed 

according to their means. Although many have advocated 
the policy of levying a different rate of income-tax on 
various kinds of income, yet no one has ever even sug- 
gested that two incomes in every respect of the same kind 
should be differently taxed, because the one income 
belonged to a bachelor, and the other to a man with a 
large family. It must, therefore, be evident that equality 
of taxation cannot mean the taxing of people according 
to their means, because this is an end which it is useless 
even to attempt to attain. 
Unsafisfac- There is another test of equality of taxation, v/hich has 
^ofllie^^"^^^ been regarded by numerous writers as perfectly satisfactory. 
theory that These Writers affirm that the revenue of a government is 
l^lwuldle employed in protecting the lives and properties of its, 
jpro^orf/oji- subjects, and consequently the amount v/hich each indi- 
amountof vidual contributes to the revenue ought to be proportioned 
protection to the benefit which he derives from the protection of the 
-^rom the State. But if equality of taxation is to be secured in this 
State. manner, it would not only be necessary to tax the propert}^ 
which is protected, but it would also be necessary to 
impose a poll-tax upon every member of the community, 
inasmuch as the life of every individual is of some value 
to himself; and therefore, so far as a government protects 
person, as well as property, it confers the same benefit 
upon each member of the community. It would, however, 
be a manifest absurdity to propose such a poll-tax, and: 
therefore, this scheme for securing ^ equality of taxatixin, 



On the general Principles of Taxation. 



H O O 



though it has an air of plausibility about it, is scarcely book iv. 
worthy of serious consideration. , ^^ ^ ^- , 

It does not appear at all certain that Adam Smith Adam 
distinctly conceived a plan for deciding whether, in any ^^'f^^i^'s ex- 

• ' • ... TpvcssioyiH 

particular case, equality of taxation is, or is not, secured; are i'nfZ/s- 
for his language, when apparently clear, sometimes fails to i^'^ct,for 
convey a definite meaning. His words are these: ' The thaUaxJ 
subjects of every State ought to contribute to the support ^^^^^ ^'^f^'^ 
of the government as nearly as possible in proportion to portioned 
their respective abilities; that is, in proportion to the ^^ ^^^'^'f "\ 
revenue which they respectively enjoy under the protec- ahiliuj to 
tion of the State.' Upon this fundamental principle, it is ^^'^' 
repeatedly said that every system of taxation ought to be 
based. Although we hesitate to speak lightly of that 
which has been so long revered, yet we believe it v/iil be 
found that, if the language employed by Adam Smith is 
closely analysed, his first principle of taxation is not only 
expressed in words which are obscure, but that it is almost 
useless for any purposes of practical application. It will 
be observed that Adam Smith, in the first place, affirms 
that the subjects of a State ought to contribute to the sup- 
port of the government in proportion to their respective 
abilities, and then he professes to make this statement of 
his principle more clear by enunciating it in different 
terms; for he explains that 'contributing to a government 
in proportion to a person's abilities,' is the same thing as 
'contributing in proportion to the revenue which he enjoys 
under the protection of the State.' YVe consider that wlikh are 
these tvv^o statements of the principle, if they have any "'^f*5"^ 

i~ i- ' J ^ J and incov- 

precise signification, do not mean the same, but entirely m;en< ^cs^.-. 
different thins^s. 

Adam Smith apparently intends by the first statement 
of his principle, to give an implied assent to the opinion, 
that equality of taxation cannot be secured, if simply the 
income, or property which may be possessed by each in- 
dividual is considered, without taking an}^ notice of various 



524 Manual of Political Economy, 

other circumstances which may cause any particular tax to 

be really much more burdensome to one individual than 

another, although they may possess equal incomes. Hence 

this question is at once suggested, What does Adam Smith 

AUlity to wish to signify by the expression 'ability to pay'? Should 

not he con- 'ability to pay' be estimated by the amount of wealth 

sidered as which a man may possess ? If so, a man whose income 

pVOpOT- . «/ -L 

iiunate to IS Only 50?. a year, ought to pay just half as much in 

income, taxation as a man whose income is lOOl. a year. We do 

not assert that, if taxation were so adjusted, it would be 

fair and equitable, but we wish to point out to our readers 

that different significations are sometimes attached to the 

expression 'ability to pay;' and Adam Smith does not 

definitely tell us which signification ought to be accepted. 

Some people have urged that, if a certain income, which 

it may be assumed is 501. a year, is only just sufficient to 

provide the possessor of it with the bare necessaries of life, 

then he who has such an income cannot be said to have 

any 'ability to pay' a portion of it in taxation. Adam 

Smith probably did not make any allowance for such 

considerations as these, and we will therefore suppose that, 

in his opinion, a system of taxation would be perfectly 

equitable, if it could be so arranged that an individual 

whose income was lOOZ. a year, should contribute just 

twice as much to the revenue of the State as an individual 

whose income was only 501. a year. We say that this was 

probably his opinion, because he endeavours more fully to 

elucidate his principle by affirming that each individual 

ought to contribute in proportion to the amount of revenue 

which the State protects for him. But even admitting 

that this is the meaning of Adam Smith's principle, we 

and pro- may farther ask. Does it provide any measure or standard 

ife^ualT^ of equahty of taxation by means of which the justice of 

any particular tax might be ascertained? Let us test the 

practical utility of this principle, by applying it to our own 

fiscal system. 



On the general Principles of Taxation. 525 

It has been previously affirmed that equality of taxation book iv. 
passes out of the legislator's control, if it is necessary to ^ — ^ ^' > 
raise a revenue by taxing commodities. The amount Taxation 
which each individual contributes to a tax on commodities ^?? commo- 

. . PI- adieii ren- 

must be entirely regulated by the consumption 01 this ders it 
commodity, and can, in no way, be apportioned to the *^ipom&^^ 
ability of each individual to pay the tax. The inequality accordinr/ 
which, accordinsf to Adam Smith's definition, is thus intro- ^^ «'-"^'^z/ 

. . . to pay, 

duced, cannot be remedied by an adjustment of that portion 
of the revenue which is raised by direct taxation. Although 
it may be a debateable question, whether an income de- 
rived from some temporary source, such as a profession, 
should be taxed at the same rate as an income which is 
derived from freehold land, yet no one has ever thought of 
proposing, that two incomes of the same kind and the 
same amount should be differently rated, because other 
taxes may le\y from the possessors of these two incomes 
amounts which are not proportioned to their respective 
abilities to contribute to the revenue of the State. 

We have made these remarks for the purpose of showing jTence 
that Adam Smith's first rule is of no practical use, if it is ^^^^^^,^ 
applied to test the justice or injustice of any one particu-/rs« ruleh 
lar tax; in fact, we think it very important to establish ^/JJ^^^^J"'^' 
this point, because we conceive that, upon this first rule of a test of 
Adam Smith's, many errors with regard to taxation have ^^fl^f^^^ 
been based. Examples of such errors are frequently met 
with in the various proposals which are made for the 
adjustment of the income-tax. Thus it is often affirmed 
that an income which is derived from a temporary source, 
ouorht not to be taxed at the same rate as an income 
arising from a permanent source; because it is argued 
' that the owner of a temporary income has not the same 
ability to pay the tax as the possessor of a permanent 
income, since the former has to set aside a larger portion 
of his income to provide against future contingencies than 
the latter. In our opinion such an argument involves a 



526 Manual of Political Economy. 

BOOK IV. fallacy ; it would no doubt be perfectly fair to apply Adam , 
^— ,^-1-^ Smith's first rule to one particular tax, such as the 
income-tax, if it could also be applied to every other tax 
which is imposed. We have, however, shown that such a 
general application of this rule is impossible ; it does not 
therefore follow that the inequality which is necessarily 
associated with some taxes, would be any way diminished 
by attempting so to arrange one particular tax, that each 
individual should contribute to it in proportion to his 
ability to pay it. 
ExempUfi- In order to illustrate this remark, let it be assumed that 
'ihe useless- ^^^ wliole revenue of the State is obtained by a 20 per 
ness of the cent, income-tax, and by a high duty on some article of 
plkdto^a' general consumption, such as tea. Let it also be farther 
system of assumed, that there are two individuals, A and B, whose 
incomes are respectively 5001. and 1,000Z. a year. If A 
and B have the same number of children, they will pro- 
bably purchase nearly the same quantity of tea, and, 
therefore, they v/ill contribute, as far as the tea-duty is 
concerned, nearly the same amount to the revenue, al- 
though the ability of one to pay the duty is twice as great 
as that of the other. Now, this inequality of taxation 
would manifestly remain untouched, if the income-tax 
were levied in strict accordance with Adam Smith's first 
rule, and if each of these two individuals were consequently 
made to contribute to the income-tax in proportion to his 
ability to pa}^ In order to remove the inequality which 
is connected with the tea-duty, it would be necessary to 
make some kind of compensation to the possessor of the 
smaller income, and, therefore, a smaller rate of income- 
tax ought to be levied from the possessor of the income of 
500?. a year, because he contributes a larger proportion of 
his income to the tea-duty, than is contributed by the 
owner of the income of 1,000Z. We readijy admit that such 
an attempt to adjust the burden of taxation could never 
produce perfect equality ; but it is only by adopting such 



On the general Principles of Taxation, 527 

a course, that even an approximation towards equality of book iv. 
taxation can be attained. It therefore appears that, al- v ^^; '' . ' 
though Adam Smith's first rule of taxation ought not, 
under any existing revenue system, to be applied to any 
special tax, yet the principle is no doubt true, when ex- True state- 
pressed in the following manner :— The aggregate amount '^^^ ^^. ''^^ 
Avhich each individual pays in taxes, ought to be in propor- 
tion to his ability to contribute to the revenue of the State. 

In the remarks which we now proceed to make upon Equality of 
various special taxes, we shall attempt to show that the ^^^^^\^^ 
equality ol taxation which this principle is intended to proximate- 
define, can never be perfectly secured. It may, however, ^^ obtained. 
be approximately obtained by giving to one class, with 
regard to some taxes, certain advantages which will, in a 
rough kind of way, provide a compensation for disadvan- 
tages which the same class may suffer from inequalities of 
taxation, perhaps inseparably associated v/ith other por- 
tions of the national revenue. 



528 




CHAPTER 11. 

ON THE INCOME-TAX. 

'E select the income-tax, as the first of those taxes 
^vhose effects we shall specially investigate ; because, 
The consid- ^t the present day, there are many points with regard to 
eration of the levying of the income-tax which are keenly disputed 
tax involves ^J financiers and political economists of high authority. 
mariT/ ques- ^^Q ^re, moreover, induced to adopt this course, because, 
in the last chapter, we had frequent occasion to refer to 
the income-tax, in order to illustrate our remarks on the 
general principles of taxation. Since we are about to 
discuss many questions which are, at the present time, 
exciting great popular interest, we wish to assure our 
readers that we shall anxiously avoid expressing any 
opinion which has a political bias. It would, for instance, 
be extremely inappropriate in this treatise to make any 
remarks concerning either the policy of our present ex- 
penditure or the administration of our national finances ; 
these are questions for the politician. The principles of 
political economy cannot decide what expenditure ought 
to be maintained, although they may enable the states- 
man to trace the effects of any tax which may be imposed, 
and thus give him the power of selecting those taxes 
which are most equitable, and which will cause the least 
loss and inconvenience to the nation at large. 
Ought tem- The chief point of dispute concerning the income-tax is 
poraryin- gix^ply this: Ought incomes arising from a temporary 
taxed as source to be taxed at the same rate as incomes which 



On the Income- Tax, 529 

may be regarded as permanent? There is no doubt that 
the greater number of people who have written on this 
subject express a very decided opinion, that the barrister Azr7% as 
who is derivins^ 1000^. a year from his profession, oug^ht ^^^*""^t^* 
not to pay so high a rate of income-tax, as the landowner 
who receives lOOOZ. a year from freehold land. The argu- 
ments which are urged in support of this opinion may 
be divided into two classes; the first of these classes is 
based upon arithmetical reasons, whereas the other set of 
arguments appeal to the general principles of taxation. 
Let us, therefore, first consider the arguments which are 
supposed to be supplied from arithmetical considerations. 

It is urged that the income of a professional man ought Statement 
to be regarded as an annuity for a certain term of years, ^f^^*-^^'^^* 
It is therefore maintained that a man who derives 1,000?. 
a year from some permanent source of income ought to 
pay a higher rate of income-tax than a man who only 
enjoys an annuity of 1000?. for a certain number of years, 
which, for purposes of illustration, we will suppose to be 
twenty. We will first discuss this question as one of pure 
arithmetic, and we will then consider the plea that is 
urged in favour of an annuitant, on the ground that he is 
not so well able to pay the income-tax which is now levied 
upon him as is the possessor of a permanent income. 

The arithmetical argument will be most clearly eluci- ^Wi!A- 

dated by an example. Let it, therefore, be assumed that ^^^^*^^^ , 
•^ ,; . . , argument. 

the current rate 01 interest is three per cent., and that two 

brothers, A and B, each inherit from their father 10,000?. 
A invests his money in the funds, and the rate of interest 
is three per cent. ; he will, therefore, obtain a permanent 
income of 300?. a year. B invests his 10,000?. in pur- 
chasing an annuity of 600?., continued during his life- 
time. Let it be further assumed that the income-tax is 
a shilling in the pound. According to the present mode of 
levying the tax, A would pay 15?. a year and B would pay 
30?. a year; and the question arises, Is this equitable, 

MM 



530 



BOOK IV. 

CH. II. 
' V ' 

If the 
income-tax 
vjere 

permanent, 
no injury 
would be 
inflicted 
hy taxing 
temporary 
and per- 
manent 
incomes at 
the same 
rate. 



Manual of Political Economy. 

considermg that A and B both possess the same amouat 
of property? In order to answer this question, let it be in 
the first instance supposed that the income-tax is a uni- 
form permanent charge, and that the government is will- 
ing to redeem the tax. It is upon this hypothesis quite 
evident, that an annuity of 600Z. a year for B's life-time, is 
exactly equal in value to an annuity of 800?. a year con- 
tinued for ever, supposing the rate of interest to be three 
per cent. ; for either of these annuities can be obtained by 
the investment of 10,000?. But if the income-tax were 
permanently fixed at the uniform rate of five per cent., A's 
10,000?. would have to pay an income-tax of 15?. a year 
for ever, because he is supposed to invest it in the form of 
a permanent annuity. B's 10,000?., however, would only 
have to pay 30?. a year during his life-time, because his 
annuity of 600?. a year will cease at his death. If A and 
B wished to redeem the income-tax on the 10,000?. which 
they respectively possess, they would each have to pay 
exactly the same sum to the government; for the present 
value of an annuity of 30?. a year to be continued during 
B's life-time must be equivalent in value to a permanent 
annuity of 15?. a year, because it has been assumed that 
the present value of these annuities is equal, when they 
have been both multiplied by twenty, or in other words, 
when they are respectively 600?. and 300?. a year each. 
If, therefore, the income-tax was permanent and uniform, 
it appears to us on mere arithmetical grounds that a tem- 
porary income such as an annuity for a limited term of 
years ought to be taxed at the same rate as a permanent 
income. If it is supposed in the example which w^e have 
just been discussing, that permanent incomes are taxed at 
the same rate as temporary incomes, then A and B v/ould 
have to pay the same amount to redeem the income-tax 
upon the 10,000?. which they inherited from their father. 
Such an arrangement would be just and equitable, since 
we can conceive no valid reason why B, because he decides 



On the Income-Tax, 531 

on investing tlie money in a temporary annuity, should book iv. 
pay a less amount to redeem the tax than A, who invests , ^^'^ ^2^. 
the money in a permanent income. But an undoubted 
injustice would be inflicted on A if temporary incomes 
were taxed at a lower rate than permanent incomes. 

Let it, for instance, be assumed that a permanent income A difference 
pays a tax of five per cent., whereas a life-annuity an- ^^J^{^ ^^^^ 
nually pays two and-a-half per cent. According to this tmjmt to 
assumption, B would only have to pay half as much as A gJ^f^^Va 
in order to redeem the income-tax on 10,000Z. Why, 'permanent 
again, we ask, should not the amounts which A and B have ^^^^'^^^• 
both to pay be the same, when it is remembered that 
A and B both originally possessed 10,000^., and at their 
own free will chose different kinds of investment? We, 
therefore, think the above example, simple as it may 
appear, affords a conclusive arithmetical argument that, if 
the income-tax were permanent and uniform, temporary 
incomes ought to be taxed at the same rate as permanent 
incomes. The conclusion, however, which has just been 
established is based upon a particular hypothesis; and it 
rendains for us to enquire whether the same conclusion holds 
true, when an income-tax is neither permanent nor uni- 
form. 

Yfhenever the income-tax has been imposed in our own Theincome- 
country, statesmen have always most explicitly affirmed ^^^^^^^^^ 
that it is only resorted to as a temporary expedient. In neither 
order to give a technical form to these assertions concern- '^^Q^^^nt^^ 
ing the temporary character of the income-tax, the con- form in 
tinuance of this tax from year to year is based upon a*''^^ * 
special Act of Parliament. The people are, moreover, 
repeatedly assured by successive Chancellors of the Exche- 
quer, that the income-tax shall be reduced immediately 
the finances of the country will permit such a reduction. 
It is, therefore, evident that the income-tax is neither 
permanent nor uniform; for no other tax in our whole 
fiscal system is so temporary in its character, or so varying 

M M 2 



532 Alanual of Political Economy. 

in its rate. When this is borne in mind, it may seem that 
the views we have above expressed cannot be maintained,, 
and that temporary and permanent incomes ought no 
longer to be taxed at the same rate. 
If the In order to settle this point, let us revert to our pre- 

^is^ordyfora ^'^^^^ example, and suppose that an income-tax of five per 
Jmed period cent, is imposed for five years, and that A and B are two 
rar^jTn-^' i^^dividuals who inherit 10,000L each from their father. Let 
coraeshould it also be further assumed that A invests his money in the 
a loiver ^'^^^^ ^nd obtains an income of SOOl. a year, and that B 
rate. purchases with his 10,000?. a life-annuity of 600?. If, there- 

fore, permanent and temporary incomes are taxed at the 
same rate, A will pay five times 15?. or 75?. during the five 
years that the income4ax is supposed to be continued, where- 
as B will pay 150?. in income-tax. Now it may be urged 
that this cannot be just; for why should B pay twice as 
much in income-tax as A, since they both originally have 
the same amount of property which they choose to invest 
in a different manner? Hence it appears to us quite indis- 
putable, that temporary incomes ought to be taxed at a 
lower rate than permanent incomes, if the income-tax 
can be really considered to be imposed for only a limited 
period, which we have here assumed to be five years. 
Experience, however, incontestably proves that the time 
during which the income-tax will be continued can never 
But the _ be predicted even with approximate accuracy. This un- 
never really certainty, consequently, renders it impossible to frame 
fidced. any equitable method of adjustment based upon the hypo- 

thesis that the tax will not be continued for a longer 
period than that which is originally proposed. For let us 
see what would have been the result if such a method of 
Results adjustment had been adopted in our own country. 
folhwfrom' ^^^ ^^® ^^^^ 1854 the Chancellor of the Exchequer con- 
different fidently affirmed, that the income-tax would be gradually 
o^^^(!oM^'f' reduced, and would be entirely abolished in the year 1860. 
iry- Here, then, a case is presented, exactly similar to that 



On the Income-Tax, 533 

which we have beeu just discussmg; for, re vert mg to our book iv. 
original example, we may assume that the two brothers A . ^^ ^ "- , 
and B come into possession of 10,00(U each in the year 
1854. A invests his 10,000/. in the funds, and obtains a 
permanent income of 300^. a year, whereas B purchases 
Avith his 10,000^. a life annuity of 600^. It is therefore 
manifest that, if temporary incomes are taxed at the 
same rate as permanent incomes, B will each year con- 
tribute twice as much to the income-tax as A. Now if 
the income-tax is only a temporary impost which is certain 
to be repealed in the course of six years, B might very 
fairly urge that, since his income is derived from the same 
amount of property as his brother's, they ought to con- 
tribute the same amount to the income-tax. B mio^ht 
also further urge tha,t, if he and his brother both wished 
to redeem the income-tax upon their 10,000Z., they ought 
to pay the same amount for this redemption; B would 
however be compelled to pay twice as much as A, in order 
to redeem the tax, if temporary incomes were taxed at the 
same rate as permanent incomes. 

Those who believed that the income-tax would inevitably The tmcer- 
expire in the year 1860, would have found it difficult to ^"^^ ^^^^ 
answer the argument which we have just supposed to be income-tax 
advanced by the individual B. But if such a claim '^'^^equUahle^^^ 
favour of temporary incomes had been admitted, let us see adjustment 
what would have been the result. The year 1860 comes ; p^^'j^Jj^^g^^ 
the income-tax is neither repealed nor reduced, but is, on f«^f^ ^«"*- 
the contrary, greatly increased, and even those financiers inloines. 
who indulge in the most reckless assertions, would now 
scarcely venture to hazard a prediction as to the period 
when the income-tax is likely to be reduced, much less to 
be entirely remitted. We therefore maintain, that an 
equitable adjustment would not have been secured, but, 
on the contrary, a great injustice would have been done 
to the possessors of permanent incomes, if, in the year 185-t, 
our statesmen, acting on the supposition that the income- 



534 Manual of Political Economy, 



BOOK IV. tax would only be continued for six years, liad capitalised 
■ ^^- "• . all temporary incomes, and then so arranged the income- 
tax, that the same amount of property, though differently 
invested, should contribute the same amount to the in- 
come-tax. We will adduce another example, in order more 
clearly to illustrate the injustice which such a method of 
adjustment would have entailed. 
A further Let it be assumed that one of the brothers, B, invests 
Tei^jmtice'^'^^ 10,000^. in the purchase of an annuity of 2000^., to be 
resulting continued for six years. The other brother A still invests 
attended ^'^^ 10,000?. in the funds, and obtains a permanent income 
adjustment, of 300?. a year. Let it also be assumed, that in 1854 the 
income-tax was five per cent., and that it was to remain at 
this amount until the tax was entirely repealed in 1860. 
If permanent incomes were taxed at the same rate as 
temporary incomes, then A during these six years vfould 
only contribute 90?. to the income-tax, whereas B, who 
has purchased an annuity of 2000?., Avould contribute 600?. 
Now there can be no doubt but that such a result would 
be extremely unfair, if the income-tax was certain to be 
repealed at the end of the period originally fixed. We 
have before remarked, that A and B, each inheriting 
10,000?., the tax ought not to take more from one than 
from the other ; it would therefore seem, that B as well as 
A ought to contribute only 15?. a year, and consequently 
B's income would only be taxed at the rate of -| per cent. 
The equity of such a method of adjustment entirely de- 
pends on the income-tax being repealed at a fixed definite 
period. Experience however proves, that the time for the 
repeal of this tax can never be definitely fixed ; for, when 
the year 1860 arrived, the repeal of the income-tax seemed 
indefinitely remote ; according therefore to the method of 
adjustment which has been just described, B's 10,000?. 
invested in an annuity would in the aggregate only con- 
tribute 90?. to the income-tax; whereas A has already con- 
tributed the same amount, and will still have to pay income^ 



On the Income-Tax. 535 

tax upon his 300?. a year, during tlie whole time that the 

tax may happen to be continued. We therefore think, 

that the most simple and the most just plan is to consider Theincome- 

the income-tax, and every other tax, as permanent. The ^^^ f^^ould 

' ^ '^^ . . oe regarded 

extreme uncertainty which exists with regard to the as perma- 
charges which may be made upon the revenue of a country, "^^^' 
renders it impossible for any one to foresee when a particu- 
lar impost maybe reduced or repealed. But if the income- 
tax is regarded as a permanent charge, the whole weight of 
the arithmetical argument is opposed to the opinion, that 
there should be any difference in the rates imposed upon 
temporary and permanent incomes. Besides the arith- 
metical arguments which support such a conclusion, other 
subsidiary reasons may be advanced in favour of a uniform 
ratiuGf. 

In the first place it may be remarked, that a uniform ^^ adjust- 
income-tax can be collected with great facility, and at com- further 
paratively little expense ; there would, however, be endless madeim- 
complications and confusion, if a method of adjustment i)y ^/^g com- 
was attempted, based on the plan of capitalisino^ temporary p^^^afec? ar- 

^ . , . i. ^ . rangemenU 

incomes, h or mstance, a dinerent amount 01 income-tax ^Mch it 

would have to be levied each successive year from indi- ■^.^"^^''^^^*" 

.... sitate, 
viduals who possessed annuities for a limited period, since 

the ca^pitalised value of a temporary annuity diminishes 
each successive year. Again, a great variety of compli- 
cated and uncertain rules must be laid down, for the pur- 
pose of estimating the capitalised value of incomes derived 
from speculative investments, such as mining. The diffi- 
culty of estimating the capitalised value of incomes arising 
from trades and j^rofessions would involve still more com- 
plicated calculations. Thus the barrister of forty, who has 
a professional income of 1000?. a year, ought to be taxed 
at a higher rate than the barrister of sixty, who has the 
same professional income. The income of the one is likely 
to continue very much longer than the income of the 
other, and, therefore, the capitalised value of the former 



53<^ 



Manual of Political Economy, 



Example in 
the, difficul- 
ty of com- 
paring a 
harrister''s 
with a 
solicitor''s 
.income. 



Arguments 
in favour of 
adjustment 



income is very much greater than that of the latter. Nu- 
merous other difficulties may be readily suggested; the 
income of the barrister is wholly lost to his family at his 
death, but the income which a solicitor obtains from his 
business may be partly enjoyed by his family after his de- 
cease, since the good- will of his practice may be either sold, 
or some person may be taken into the business as a part- 
ner, who will pay the family a certain annual sum. The 
capitalised value of a solicitor's professional income must 
be therefore greater than the capitalised value of a barris- 
ter's income of the same amount. Hence, it would appear 
that incomes derived from one branch of the law, ought to 
be taxed at a higher rate than incomes derived from other 
branches of the profession. The settlement of such intri- 
cate questions as these would give to the income-tax some 
of the worst qualities that belong to a tax; for it would be 
uncertain in its amount, and it would be so difficult to 
adjust in the various special cases which may arise, that 
a whole army of income-tax collectors and commissioners 
would have to be employed ; consequently the expense and 
inconvenience of collecting the tax Avould be enormous. 
These considerations strengthen our conviction, that the 
income-tax ought to be levied at a uniform rate, and we 
entertain this opinion with all the more confidence, because 
the arithmetical arguments that can be adduced certainly 
do not oppose, but rather favour, the present method of 
levying the tax. We, however, are quite aware, that the 
principle of a uniform income-tax is opposed, for reasons 
which are quite independent of any arithmetical calcula- 
tions. These reasons which we now proceed to consider 
are, in fact, based upon that first great maxim of Adam 
Smith, which is popularly thought to define equality of 
taxation. 

The persons who oppose a uniform income-tax maintain 
that, whether a temporary and uncertain income ought to 
be taxed at the same rate as a permanent and certain 



On the Income-Tax, 537 

income, is a question whicli must be settled independently book iv. 
of arithmetical considerations. For instance, it is fre- . ^^; "' . 
quently affirmed, that an income derived from a trade or indepen- 
profession ought to be taxed at a much lower rate than ^f'^^ ^f ^'f 

0.001)6 CtTlth- 

an income obtained from some such permanent and certain metical con- 
source as the funds, or landed property. When it is asked ^^^^^'^^'ons'. 
why this distinction should be made, it is considered 
quite sufficient to reply, that the tradesman or ]3rofessional 
man who obtains an income of lOOOZ, a year cannot so 
w^ell afford to pay the income-tax as the individual who 
receives an income of the same amount from the funds, or 
from landed property. Now this is undoubtedly true, 
since the income of the tradesman or professional man is 
uncertain, and may be altogether lost in the event of his 
death ; whereas the possessor of a permanent income can 
at his death leave it intact, to be distributed amongst his 
family. It is, therefore, indisputable, that the income-tax 
ought not to be levied at a uniform rate, if the principle 
is admitted that each single tax should be so adjusted 
that every individual should contribute to it in, proportion 
to his means, or, in other words, in proportion to his ability 
to pay the tax. 

It has been stated in the preceding chapter, that this Theprin- 
principle is in the abstract perfectly true, and it would no (^h^^^^f 

, CQUdlltlJ 

doubt secure equality of taxation, if it could be practi- though true 

cally applied to adjust all the taxes that are imposed. '^ ^^^^ 

But we have already shown the impossibility of this, by imprac' 

alludino^ to various indirect taxes. No method of adiust- '^^'^^^^V* 
. , .,..,, . execution 

ment will cause individuals to contribute to taxes on com- and unfair 

modities in loroportion to their means; the amount which '^J ^W^\^^ 

J- ■•- . . , ' to one tax 

is levied from each individual, by these taxes, depends alone. 
ujDon the quantity of a commodity which he may consume. 
Hence we have concluded that equality of taxation is not 
necessarily promoted by adjusting some particular tax in 
such a way that each individual would contribute to it 
in exact proportion to his means. For instance, if the 



53^ Manual of Political Economy, 

BOOK IV. income-tax were adjusted in strict accordance to tliis rule, 

CH. II. . . 

' — '^r-^ every labouring man in the country ought undoubtedly 
to contribute his quota to the tax; and yet the introduc- 
tion of such a change into our present fiscal system would 
certainly not promote equality of taxation. The labouring 
classes are most justly relieved from the income-tax, 
because, in the first place, it would be difficult to collect 
it from them, and in the second place, they contribute 
to such a tax as the duty on tea a much greater amount, 
in proportion to their means, than is contributed by the 
wealthier classes of the community. The remission of the 
income-tax upon such incomes as are ordinarily possessed 
by labouring men, affords some compensation for the 
inequality of taxation which is necessarily associated ^nth 
such an impost as the duty on tea. Inequality of taxation 
may be therefore rather increased than prevented by 
applying to any particular tax such a rule as that v^e have 
Equality of'^xi^l noticed. Equality of taxation can be best secured, 
U aimed at ^^^ ^7 botching and patching each single tax, but by 
ly contem- contemplating the revenue as a whole. If it is found that 

plating the . -., . , , . . 

revenue as ^^J "t^x presses unequally on any particular class, it is 
a whole. almost invariably better not to attempt to adjust the tax 
by any complicated arrangements; the inequality of tax- 
ation should be remedied by placing the particular class 
whom it prejudicially affects, in a relatively advantageous 
Some taxes, position with regard to some other tax. Thus the tea- 

such as that i , r • i j.i i • i i ■ 

on tea m?2- *^^v P^^^^®^ very untairly upon the working classes; but 

not he made itis in every respect more desirable to compensate them 

fairly ly ^^^ ^^^^ inequality of taxation, by a remission of the 

themselves income-tax, than to afford them compensation by attempt- 

producing i^g ^^ make the tea-duty so equitable in itself, that every 

greater individual should contribute to it in proportion to his 

balancing means. Yarious proposals for making the tea-duty a 

evils. more equitable tax have been, and may be, suggested; 

for instance, one source of inequality would be removed, 

if the tea-duty could be made ad valorem. The duty which 



On the Income-Tax, 539 

is now paid upon the tea consumed by the poor man is at book tv. 
least three times as great, in proportion to the vahie of - — - 
the tea, as is the duty which is paid upon the superior 
qualities of tea. It has, however, been found almost im- 
practicable to levy ad valorem duties upon such a com- 
modity as tea; it was soon proved that these ad valorem 
duties entailed a series of complicated arrangements, which 
materially interfered with the trade, and, consequently, 
the tax when made ad valorem, though apparently more 
just, was really more disadvantageous in its aggregate 
results than it was before. Let us therefore enquire 
whether similar obstacles would not oppose all the schemes 
which are often favourably received, for rendering the 
income-tax more equitable. 

Almost insuperable obstacles at once suggest themselves, Impossi- 
if an attempt is made to levy the income-tax in such a iJJ^ftif, 
way that each individual should contribute to it in pro- income-tax 
portion to his means. It may be at once asked, How is it ^^J^g g^.^™ 
possible to supply any test or measure of the amount one con- 
which a man can afford to pay towards a tax? Certainly cordmgto 
such a test or measure is not provided by the nature oi his means. 
the source from which an income may be derived ; for the 
income of almost every individual is obtained from a great 
variety of different sources; therefore some portion of his 
income would be perm.anent, and another part of it may 
be temporary. Consequently it is impossible to judge of 
an individual's means, by considering only one part of his 
aggregate income. Thus A may possess 20()0Z. a year in 
landed property, and may, in addition to this, derive 1000^. 
a year from his profession. Another individual, B, may 
possess only 500^. a year in landed property, but has a 
permanent income of 1000^. a year from the funds. On 
what grounds do those who oppose a uniform income-tax 
affirm that the 1000^. a year which B obtains from the 
funds, should be taxed at a higher rate than the 1000?. a 
year which A is supposed to realise from his profession? 



54^ Manual of Political Economy. 

B is a much, poorer man than A, and it therefore cannot' 
be maintained that B, with regard to a portion of his in- 
come, should be taxed at a higher rate than A, because 
the former can better afford to contribute to the tax than 
the latter. In addition to the difficulty which has been 
just suggested, it would be necessary to fix the rate at 
which each kind of income should be taxed by arbitrary 
rules, which would be subjected to constant discussion and 
revision. With regard to professional incomes, it has 
already been said, that the solicitor whose practice is 
w^orth 1000^. a year is a far richer man than the barrister 
whose practice is of the same value; since a solicitor can 
either sell the good-will of his business, or leave it to his 
children, whereas the practice of a barrister can neither be 
sold nor handed over to another. If, therefore, a per- 
manent source of income is taxed at the rate of five pei* 
cent., what principles can be found which will tell us the 
amount of income-tax which ought to be levied from the 
incomes of solicitors and barristers respectively? These, 
and various other considerations which might be adduced. 
The present lead US to the conclusion, that the present method of 
'probabl^ levying the income-tax cannot with advantage be materi- 
tke best. ally changed. The income-tax, as it is now levied, avoids 
those difficulties and complications which we have noticed, 
and it must always be remembered that, if the arrange- 
ments connected with any tax involve any intricate details, 
the collection of the tax must be expensive. If, moreover, 
an attempt should be made to equalise this tax by any 
complicated process of adjustment, many practical diffi- 
culties would be sure to arise, which would probably lead 
to disputes and costly litigation ; and thus even those will 
become more discontented, wdio are specially intended to 
be benefited by the adjustment of the tax. 
Meaning of As we have now remarked at considerable length upon 
the term, ^ question concerning the levying of the income-tax, which 
'is at the present day exciting great popular interest. 



On the Income-Tax. 541 

we will next proceed to remark upon that which is techni- book iv. 
cally termed the incidence of the tax. As we have not . ^\^^' . 
previously employed this word, it will be necessary to 'incidence 
define it. Now it is quite evident that a tax is frequently ^f ^^f^- 
not really paid by the person from whom it is levied; for 
instance, the malt-duty is nominally paid by the maltsters, 
although it is really paid by the consumers of malt, since 
the price of malt is increased by the exact amount of the 
duty which may happen to be imposed. Similarly, all 
taxes on commodities are really paid by the consumer, al- 
though the government generally levies the tax from either 
the producer or the importer of a commodity. Hence, it 
is said that the incidence of these taxes falls on the con- 
sumer, and therefore the incidence of a tax may be con- 
sidered to denote the real, in distinction from the nominal, 
payment of the tax. As another example it may be men- 
tioned, that the incidence of the poor-rates which are 
levied upon the land, falls upon the land-owner; for, al- 
though such rates are paid by the farmer, yet the rent of 
the land would be so much greater if there were no such 
rates. The incidence of those taxes which we have just 
noticed, is very easy to trace ; but with regard to the inci- 
dence of some other taxes, such as the income-tax, many 
questions of much perplexity and importance are sug- 
gested. Some of these questions we will now proceed to 
consider. 

It may perhaps be remembered, that when expounding ^^g {, 



mci- 



some of the fundamental propositions concerning capital, ^/^^.^ ^f 

-, \ . , . -. the tncoine- 

we occasionally reierred to the mcome-tax, m order to tax will 
show the different results which ensue, according as the *'a»'y «c- 

. . IP- 1 cording as 

tax IS paid out of capital, or is saved irom increased u is paid 
economy. In the first case, the incidence of the tax partly ^"^ ?f 

•^ 1 • 1 J capital or 

falls on the labouring classes, whereas, m the second case, saved from, 
the incidence of the tax does not fall on any one but those ^^P^^<^>'- 
who pay it. That this must be so is evident, from the 
following considerations. It has been frequently remarked. 



54^ Manual of Political Economy. 

that tlie capital which supports the industry of a country 

is composed of two portions, which are respectively termed, 

If paid out circulating and fixed capital. The circulating capital of 

of capital ^ country is its wao^e-fund. If, therefore, this fund is 

trie mci- ... . 

dence will diminished, there will be a smaller amount to distribute 

extent w>07i ^^<^^^&st the labouring classes, and less average wages will 
the labour- be received. The fixed capital of the country consists of 
ing classes, niachinery, stock, implements, and, in fact, of every kind 
of wealth which exists in some permanent form, and which 
is intended to give assistance to the future production of 
wealth. If, therefore, any tax should diminish the fixed 
capital of the coimtry, and should thus cause less machinery 
to be used, or fewer useful public works to be carried out, 
the industry of the country would be interfered with, 
and the progress of the nation's wealth would be obstructed. 
If the income-tax were partly paid out of capital in a 
country which accumulates wealth rapidly, it is almost 
certain that the amount would be withdrawn, not from 
fixed, but from circulating capital. As far as the labourers 
are concerned, it in the first instance makes little differ- 
ence whether the income-tax is paid out of circulating or 
fixed capital; because such fixed capital as machinery and 
railways can only be constructed by labour, and, there- 
fore, if a smaller sum is spent upon such works, a smaller 
sum will be distributed in wages. It therefore appears, 
that the aggregate wages which are paid must be di- 
minished, if the income-tax be either wholly or partly 
paid out of the capital of the country. It consequently 
follows that, if any portion of the income-tax is paid out 
of capital, the incidence of the tax partly falls on the 
labourers, although the tax may never be directly levied 
from them. It will be instructive to explain the process 
by which the burden of this tax is, as it were, shifted from 
one class to another. 
Explana- Let it be assumed that an income-tax of ten per cent, is 
con of w ^j3^pQgQ j^ g^^^d that throughout the country one half of the 



On the Income- Tax, 543 

tax is saved from each individual's personal expenditure, book iv. 

• CM IT 

whereas the other half is provided out of capital. Upon < — U-l>> 
this hypothesis, an individual, A, who has an aggregate process by 
income of 2000^. a year, would be rated at 200^. a J^^'^','[nddmclof 
his nett income is therefore 1800?. His personal expendi- the tax is 
ture is lOOOZ. a year, and he, therefore, annually saves Ij^^^^.^^ 
800?., which he can invest as capital in his business. If 
there were no income-tax, his annual income would be 
2000?., but, according to our hypothesis, he will only spend 
one half of the 200?. a year, which would be added to his 
income if the income-tax were remitted; he would con- 
sequently each year save 900?. if there were no income-tax, 
and this sum he might employ as capital in his business. 
The amount of capital which he accumulates is therefore 
annually reduced by 100?. in consequence of the income- 
tax. Capital must, however, be applied, either directly or 
indirectly, in paying the wages of labourers, and, therefore, 
the income-tax diminishes by 100?. the amount which A 
annually pays to labourers; consequently this amount is 
as really paid by the labouring classes as if the income-tax 
was directly levied from them. 

It is impossible to assign the exact proportion of the TJie share 
income-tax which will be paid out of capital ; but it is paidout'of 
nevertheless quite certain that an income-tax would be cajpital^ 
paid out of capital to a far greater extent in some coun- different 
tries than in others. As an example, it may be men- countries. 
tioned that the industrial progress of India is retarded by 
a want of capital ; her accumulation of capital is compara- 
tively so small, that an income-tax could not be imposed 
in that country without diminishing the national capital, 
and in this way most seriously affecting the national 
wealth. In England, however, the income-tax produces 
none of these serious consequences; no branch of our 
industry which presents a fair chance of profit is ever 
retarded for want of capital; and, in addition to all the 
capital which we invest in our own commerce and trade. 



544 



Manual of Political Economy. 



It also 
varies 
greatly in 
different 
sections in 
the same 
country. 



we always seem to possess an almost unlim.ited supply of 
capital if tlie terms which are offered for the use of it are 
sufficiently remunerative. It may, therefore, with consi- 
derable certainty be concluded, that the income-tax does 
not seriously diminish the amount of wealth which is 
produced in this country; for although some portion of 
the tax is paid out of capital, yet this amount is probably 
withdrawn, not from fixed capital, but from circulating 
capital, or, in other words, from the wage-fund. We say 
that it is not fixed capital which is affected, because that 
part of fixed capital which consists of machinery, imple- 
ments, and stock, is never sold for the purpose of paying 
the tax, nor can any one suppose that less machinery is 
employed in industry, or fewer useful permanent im- 
provements carried out in consequence of the income-tax. 
Our circulating capital may no doubt, to some extent, 
be diminished; and if this be so, a portion of the tax 
is virtually contributed by the labourers. In England, 
however, as well as in most other countries, the average 
amount of the income-tax which is respectively paid out 
of capital or saved from personal expenditure, varies 
greatly in the different sections of the community. In 
our own country each individual's expenditure is regu- 
lated far more by custom and habit, than by the amount 
of the annual income which he may have at his disposal. 
Those who have incomes of 150^. or 2001. a year are 
usually obliged to deprive themselves of many things 
which they consider almost indispensable. Such persons, 
therefore, if released from the income-tax, would proba- 
bly spend the whole additional income which the remis- 
sion of the tax would give them. The wealthy mer- 
chant, however, who is worth his 20,000^. a year, would 
most likely not increase his personal expenditure in the 
slightest degree, although the repeal of the income-tax 
might give him an additional 1000?. a year to spend. 
The additional 1000?. which he would thus annually 



On the Income-Tax, 545 

accumulate would not induce him to extend liis own book iv. 
business; lie would probably invest the 1000^. in some - -^^\ "' - 
security. It therefore appears that the additional capital 
which will be saved, if the income-tax is repealed, would 
be principally thrown into the money-market for invest- 
ment; the amount saved would not be employed as 
capital by each individual tax-payer, because in a country 
where so much commerce is transacted by credit, the in- 
dividual tax-payer would, before the income-tax had been 
remitted, have had no difficulty in obtaining extra capital 
to embark in his business. 

As far, therefore, as the capital of the country is con- In this 
cerned, the effects of the income-tax are not in this ^Sf o/'^^^ 
country so important as they are generally supposed to the income- 
he ; because^ let it be assumed (and it is rather an exces- probably 
sive estimate), that 6,000,000?. out of the 10,000,000/. «o^ so «;i- 
which the income-tax annually yields would be saved asf^g^^^gf' 
capital, if the tax were repealed. Now 6,000,000/. thrown ^'^^^^z ^^^71 

•,,1 ij-r-j-x j_ 1 assumed. 

mto the money-market lor mvestment, cannot produce 
any momentous results upon the industry of a country 
whose wealth is so great that, in the course of the present 
year*, 8,000,000/. was in a few weeks raised for the foreign 
loans without apparently exerting any influence upon our 
trade, and certainly without producing any influence which 
could be said to denote the least financial derangement. 
The remaining 4,000,000/., which, according to our esti- 
mate, is saved from personal expenditure, expresses the 
real amount of the temporary comfort and enjoyment of 
which the tax deprives the community. We have already 
said that to this last amount different sections of the com- 
munity contribute in very unequal degrees; the wealthy 
man who is accumulating capital rapidly, does not spend 
less in consequence of the tax, his personal comfort is not 
in the slightest degree interfered with, and the only result 
of the tax to him is that he possesses a few thousand 

• 1863. 

NN 



54S Manual of Political Economy. 

BOOK IV. pounds less of realised property. Very different conse- 

V ^^;"- . quences, however, result to those who possess the small in- 

Theincome- comes which just come within the range of the tax. For in- 

tax imposes gtance, an income of 150^. a year is taxed at the same rate 

ficesupon as an income of 10,000^. There can be no doubt that the 

persons owner of such a small income as 150Z. cannot pay even a 
with . . , , ■^. . , . 

moderate few pounds towards an mcome-tax, without depnvmg hmi- 

tncovies. gg]£ ^^ ]-^jg family of the means of satisfying some real want 
or enjoyment of life. The income-tax, therefore, entails a 
far greater sacrifice upon such a person than upon the 
more wealthy man who can pay the tax without encroach- 
ing upon his personal expenditure. 

The inequality to which allusion has just been made is 
attempted, in some degree, to be remedied in our own 
country by remitting the income-tax upon all incomes of 
less than 100?.; incomes between 100?. and 150?. are taxed 
at a lower rate than incomes exceeding the latter amount. 
It is, however, evident that this remedy creates another 
inequality. If an income-tax of five per cent, is imposed 
on the lowest class of incomes, the owner of an income of 
100?. will have to pay 5?. towards the tax, whereas an 
income of 99?. will entirely escape the tax. The unfair- 
Mr. MilVs ness of such an arrangement is manifest. Mr. Mill has 
proposal proposed a very simple scheme for the purpose of obviating 
riatinc/ this this, uujust anomaly. He maintains that the legislature 
injustice, ought in the first instance to decide what is the maximum 
income which should be allowed to escape the income-tax, 
and he considers that a decision upon this point ought to 
be chiefly guided by the principle that an income should 
not be taxed if it was not more than sufficient to provide 
its owner with the mere necessaries of life. Such a prin- 
ciple would of course only enable a rough estimate to be 
made ; for it would be difficult to decide whether 70?., 80?., 
or 100?., ought most consistently with justice to be the 
maximum income upon which the tax should not be levied. 
The important thing, however, is to fix a limit. Let i% 



071 the Income- Tax, 547 

therefore, be supposed that the limit is the same as now, eook iv. 
100/. a year. Mr. Mill proposes to deduct this amount • — - 
from every income, and only tax the remainder. The 
owner, therefore, of an income of 120/. a year would only 
pay the tax upon 20/. This plan manifestly provides a 
complete remedy for the inequality to which we have just 
alluded. The plan involves no practical difficulties, and 
is founded ujDon strict justice; since, if the tax is not im- 
posed on an income of 100/. because such an income is no 
more than sufficient to provide its owner with the mere 
necessaries of life, the tax ought, with regard to all 
incomes, to be remitted upon a similar amount which has 
to be expended in the mere necessaries of life*. 

The scheme which we have just described, as advocated Difference 
by Mr. Mill, is not to be confounded with any of those ^^f^^^^^^f'' 
proposals for graduating the income-tax which have been and some 
by some so warmly espoused. They urge, as an almost J^^;^^^^^ 
self-evident principle, that an income of 10,000/. ought '^ohich have 
to be taxed at a far higher rate than an income of 1,000/. ^^^'^|^''^" 
It is apparently thought that such a distinction should be 
made, because a man with an income of 10,000/. is so 



* The scheme proposed by Mr. Mill was adopted in a modified find im- 
perfect form by Mr, Gladstone in his Budget of 1863. The plan which he 
brought forward, and which was accepted by the House of Commons, was 
to deduct 601. from aU incomes between 100^. and 200Z. Thus the possessor 
of an income of ] 401. now pays the tax only on 80^. The inequality which 
previously existed has no doubt been diminished, but it has not been com- 
pletely removed; for instance, it still happens that an income of 100^. pays 
the tax on 40Z. whereas an income of 98^. escapes untaxed. Again, the pos- 
sessor of an income of 200?. only pays the tax on 140/. whereas the pos- 
sessor of an income of 205/. is taxed on the whole amount of his income. 

It may be here stated, that during the time which has elapsed since the 
publication of the first edition of this work, the income-tax has been each 
year reduced. The income-tax is now sixpence in the £. A considerable 
amount of indirect taxation has also been remitted; thus the duty on suo-ar 
has been diminished, and the duty on tea has been reduced from Is. fid. to 
Is. per lb. This reduction of taxation has been rendered jiossible from two 
reasons ; in the first place, the increasing wealth of the country has made 
existing taxes more productive, and secondly, the annual national expendi- 
ture has been somewhat diminished. Mr. Gladstone has adopted a wise 
policy in spreading the relief partly over direct, and partly over indirect 
taxation. 

nn2 



548 Manual of Political HiCOJiuiuy. 

BOOK IV, ricli, that he is hardly affected by the tax. This principle, 
■ ^^ • /^- . however, if carried into practical effect, might lead to 
MmMevous some very mischievous results ; it would, as it were, place 
nature of ^ penalty upon the accumulation of wealth. All such 

those WlllCll ^ ^ • ^ • i ' , ^ • , ^ iii 

areun- schemes which are aimed against large capitals probably 
favourable obtain popular support, because they seem to favour the 
cumulation ignorant prejudice which is so frequently expressed against 
of capital. ^]2at is termed the tyranny of capital. There was a time 
when the labourers of this country believed that the owner 
of a large capital possessed a peculiar power to oppress 
them. Superior education and the rapid extension of co- 
operative institutions are already beginning to make the 
labourers understand the true functions of capital. During 
the distress which has been produced in Lancashire by 
the cotton famine, numerous instances have occurred 
which prove that the working classes now know that capi- 
tal forms the fund from which their wages are paid, and 
that, therefore, any scheme must directly injure them if 
it retards the accumulation of capital. It should, more- 
over, be borne in mind, that the strongest theoretical 
argument which can be urged against the income-tax, is 
based upon the fact that it is imposed upon savings. The 
man who has 10,000^ a year, and spends the whole of his 
income, only pays the tax once ; but the man who has an 
equal income, and only spends a portion of it, pays in the 
first instance the same amount to the tax, and is also each 
year compelled to pay the tax upon the income which is 
derived from the investment of the amount which he has 
saved from his annual income. The income-tax, there- 
fore, to a certain degree, encourages spending, and dis- 
TMs is courages saving. This, as we have already said, is a 
7ruTin a ™^^^®^ ^^ little consequence in a country like our own, 
poor where the desire to accumulate wealth is so strong, and 

country, consequently the amount of capital which is annually 
saved is so vast. But in India the accumulation of capital 
is so vitally important, that the income-tax, because it 



On the Income-Tax, 



549 



discourages the accumulation of capital, is one of the worst book iv. 
taxes that can be imposed in that country. It therefore ^^- "• , 
follows that, as far as even England is concerned, the most 
serious objection which can be urged against the tax is 
gi'eatly strengthened if it should be so graduated that the 
tax is increased in proportion to the amount which an 
individual saves. 

We will, in conclusion, allude to a serious objection con- objection to 
nected with the income-tax which cannot be obviated bv ^^^^ '^j^come- 

. . taxjrom 

any method of adjustment. It is evident that the tax can the difficul- 
be accurately levied upon all incomes the amount of *^^ ^l ^^^^' 

. . mating 

which is, as it were, publicly known. Thus the Bank of some of the 
England, when paying the dividends arising from the funds, ^J'^'^'^J^jcA 
deducts the income-tax, and hands the amount over to it is raised. 
the government. It is, therefore, impossible for a fund- 
holder to evade the tax. The tax is also similarly deducted 
from all official salaries, and also from the pay of officers 
in the army and navy. The amount of the tax which is 
levied from various other kinds of incomes is also regu- 
lated by definite rules. For instance, a farmer's income 
is estimated to be equivalent to one half his rent. If, 
therefore, his rent is 800^. a year, and if the income-tax is 
five per cent., the income-tax levied upon him will be 20/. 
His income may no doubt be either more or less than 
400Z. a year, but when the rule has once been made, he 
has no 23ower to evade any portion of the tax, because the 
amount at which he is assessed is precisely determined. 
But with regard to various other classes of traders it is 
impossible to ascertain the amount of their incomes by 
any definite rules. The income of a manufacturer or 
retail trader can only be approximately estimated ; and an 
opportunity is thus afforded to evade a considerable por- 
tion of the tax. Morality is unfortunately too often based 
on conventionality; and many who pass for honest men do 
not hesitate to cheat the government, although in the 
private transactions of life they would shrink from doin.Qf 



55 9 Manual of Political Economy. 

anything which conld in the least degree be considered 

as dishonourable. Numerous cases have occurred which 

strikingly exemplify the dishonesty that is practised by 

many in their dealings with the government. 

The dis' The following well-known 'instance was quoted by Mr. 

which is Grl^^dstone in one of his Budget speeches. A particular street 

occasional- in London was, during a certain period, closed for traffic in 

ly thus pro- n • a. i • i • xi r 

duced. consequence oi improvements which were m the course oi 
being carried out. The business of the various tradesmen 
who lived in the street was prejudicially affected, and 
they consequently claimed compensation. The amount of 
compensation which each individual received was ap- 
portioned to the nett income which he derived from his 
business. All the tradesmen, consequently, made a return 
of their incomes. Some one thinking that these returns 
v/ere excessive, had the curiosity to compare them with 
the amount of the incomes which these tradesmen re- 
turned for the assessment of the income-tax. The 
extraordinary and, it may be added, the melancholy fact 
was revealed, that the tradesmen living in a respectable 
London street could practise so much deception, that for 
the purpose of assessing the income-tax they returned their 
incomes at a certain amount, and immediately declared 
that their incomes were double this amount when pressing 
their claims for compensation. It is, therefore, evident 
that, as long as such duplicity is prevalent, many will evade 
a part of the income-tax which they are bound to pay to 
the government. Hence the tax operates with a certain 
degree of unfairness, because certain classes of the com- 
munity have a chance of evading the tax, whereas others 
This im- iiave not. 

can scarcely The inequality which is caused by this power of evasion 
he con- jg j^q-^ \yj many so much objected to as the general im- 
weighty ar- morality which they conceive to be produced by such taxa- 
gummt -j-^q^^^^ j^ ^g^ ^q^ instance, maintained that the income-tax 

against the . . 

tax. places so great a premium upon deception, that many who 



On the Income- Tax. 551 



CH. IT. 



would otherwise be honourable, are tempted to deceive the book iv. 
government. We hardly think, however, that a statesman 
ought to pay much attention to such an argument. The 
morality of those individuals who are so easily led away 
from the patlis of virtue and honour is scarcely Avorth the 
fostering care of a government. Every precaution should 
of course be taken to detect and punish those who make 
false returns, because the burden which they escape is 
thrown upon the rest of the community. Let us, how- 
ever, hope that the general honesty of the nation is pro- 
gressing, and that therefore the force of the objection 
against the income-tax which we have just noticed is each 
year diminishing. 



552 



CHAPTER III. 



TAXES ON COMMODITIES AND OTHER INDIRECT TAXES. 



Distinction 
hetiveen 
direct and 
indirect 

taxation. 



Taxes on 
commodi- 
ties are ne- 
cessarily 
indirect. 



THE last chapter was devoted to the discussion of the 
income-tax, and although this tax manifestly differs 
in many essential respects from other direct taxes, yet in 
describing the income-tax we have pointed out many 
qualities which are common to all direct taxes. We shall, 
therefore, be enabled, after having described indirect taxa- 
tion in the present chapter, to compare or rather to con- 
trast the two systems of taxation. 

Direct and indirect taxation are words of such frequent 
use that they probably need no definition. It may, per- 
haps, however, be well to state, that a direct tax is really 
paid by the person from whom it is levied, whereas an 
indirect tax, though nominally paid by one person, is 
really paid by another individual This distinction may 
be easily illustrated by an example. The possessor of an 
income of lOOOZ., if he has to pay 100^. towards an in- 
come-tax, cannot shift the burden of the tax on any one 
else. The tax makes him so much poorer by the whole 
amount which it takes, from him ; the same remark, more- 
over, applies to other direct taxes, such, for instance, as 
a duty on a legacy, and a tax on dogs, horses, carriages, 
servants, &c. But an entirely different result follows with 
regard to an indirect tax, such as the malt duty; for in 
such a case, although the malt duty is in the first instance 
paid by the malster, yet the tax really comes out of the 
pockets of the consumers of malt, because the price which 



Taxes on Commodities and other Indirect Taxes. 553 

they are compelled to pay for malt is increased by an book iv. 
amount which must at least be equivalent to the tax im- . ^h.^iii. ^ 
posed. It is, therefore, manifest that taxes on commodi- 
ties are indirect; because if commodities are taxed they 
are increased in price, and consequently the consumers 
of the commodities really pay the taxes, although they may 
in the first instance be levied upon the importers or pro- 
ducers of commodities. 

It must not, however, be supposed that there are no Other team 

T,, ,,1 ^ ' ^ ' 1 'm.a'ii becom-e 

indirect taxes except those which are imposed upon com- ly^fii^cct 
modities; for instance, a tax which is in its essential 
character direct, may become indirect by private and 
commercial arrangements, and by many other causes. 
Thus, in England, it is customary for the tenant-farmer 
to pay poor-rates; it is, however, evident that all such 
charges as these are really paid by the landowner, because 
if a farmer has to contribute lOOZ. a year in poor rates, he 
is able to pay so much less a year for the use of his land, 
and consequently, if no poor-rates were imposed, the land- 
lord might increase the rent of his farm by the whole 
amount which his tenant previously contributed to these 
rates. The same remark applies to various other rates, «»'^ «'»- 
and also to tithes; it therefore appears that there is not ^,^„^^ ^g*^ 
necessarily an essential distinction between a direct and w«f^<^ 
an indirect tax, for we have seen that a direct may be 
converted into an indirect tax, simply by a private com- 
mercial arrangement, since there is no reason whatever 
why the poor-rates should not in all cases be paid by the 
landlord, and not by his tenant. If this were done, the 
poor-rates Avould become a direct tax. It is, therefore, 
possible that the words direct and indirect when ajDplied 
to a tax may denote only a nominal distinction; tlie tax, 
however, which is imposed on commodities cannot be made 
a direct one, since it would be impracticable to levy the 
tax upon each person who may have to purchase any par- 
ticular article; consequently, the real points of distinction 



554 ' Manual of Political Economy. 

between the two different systems of taxation will be best 
elucidated by comparing the effects of a direct tax with 
those which result from a tax imposed upon a commodity, i 
The taxes ' At the Commencement of our enquiry it may be impor- f 
here are ^^^^ ^^ remark,' that various commodities have been taxed 
those im- in our own country, and are still taxed in many other 
revenue^, not countries, in Order to" protect native industry, and not 
for pro- solely for the purpose of obtaining: revenue for the State. 

tection. . o 

We intend hereafter to discuss the theory of protective * 
duties, and we shall therefore, for the present, consider i 
those taxes on commodities which are imposed for the 
sole purpose of obtaining revenue for the State. The 
last remnant of protection has been banished from our 
fiscal system, and every tax is now carefully adjusted with 
the view of placing the home and foreign producer in a 
position of equality. 
Taxes on We have already stated that a tax upon any commodity 
commodi- j^^^g^ almost invariably be opposed to Adam Smith's first 

ties are . •; ^ ^ 

alnostin- canon of taxation, which affirms Hhat each person ought 
'variably in- j^q contribute to the revenue in proportion to his ability 

capable of ,,-'•-'- ^-^ 

satisfying to pay.' Taxes on commodities cannot be framed in 
dition'of ^^^^^lience to this rule, for various reasons. In the first 
equality of place, it may be remarked that taxes on commodities 
znci ence. ^^^ seldom be made ad valorem, and it is quite evi- 
dent that from this circumstance great inequality of tax- 
ation must inevitably result. As an example it may be 
mentioned that every pound of tea which is imported 
into this country has at the present time to pay a tax of 
Is. per pound. The inferior qualities of tea which the 
poor principally consume, would if admitted duty free be 
retailed at a price certainly not exceeding Is. per pound. 
It, therefore, follows that the tea which is used by thoso 
who are the poorest, and who are the least able to con- 
tribute to the revenues of the State, is taxed at the rate 
of 100 per cent., whereas the superior qualities of tea which 
are purchased by the wealthy at five or six shillings per 



Taxes on Commodities and other Indirect Taxes. 555 

pound, only pay a tax of twenty or tliirty j)er cent. This book iv. 

inequality of taxation, which in a greater or less degree is v '~^—L^ 

common to those taxes which are imposed upon commo- 
dities, rarely admits of any practical remedy. For instance, 
it has been frequently proposed to make, the duty on tea 
vary with the quality of the tea; but those who are most 
competent to form a practical judgment affirm that such 
a method of adjustment would be frustrated by the extreme 
difficulty and uncertainty of testing the quality of tea at 
the custom house. As we have before said, the inequality This may 
to which we have just alluded, and from which taxes when compen^ 
levied upon commodities cannot as a general rule be freed, s^^ec^ by 
must as far as possible be compensated by making other 
taxes, such as the income-tax, fall most lightly on those 
who are the most injured by the particular inequality 
which we have just described. These considerations induce 
us again to remark, that equality of taxation can be most 
effectually secured, not by framing any one tax in obedi- 
ence to Adam Smith's first rule, but by applying a general 
process of compensation to the whole revenue. 

Let us next enquire to what extent taxes on commodities Taxes geju- 
can be made consistent with Adam Smith's second rule, Iheprhi^ 
which states, 'that the amount which each individual <^w^^ of 
contributes to a tax ought to be certain and not arbitrary.' certain. 
In one sense almost all taxes on commodities strictly obey 
this rule or principle of taxation. The producer or im- 

I porter of a taxed commodity can always know the exact 
amount which the particular tax will levy upon him. If 
the duty on tea is Is. per pound, the merchant who im- 
ports a cargo of tea can calculate with strict accuracy 
the amount of duty which the tea must pay; the same 
remark apjDlies to the producer of a taxed commodity 
such as malt. The only case in which uncertainty can 
arise is when a tax is made ad valorem, because then the Tliere are 

\ test which the s^overnment may apply to ascertain the '^'^''-'f '^'' ^' 

^ -J ^ i~ -J ccptions in 

\\ value of any commodity may be uncertam and imperfect the case of 



\ 



556 Manual of Political Economy, 



BOOK IV. in its operation. There has been an instance of this in 
CH. III. ^\^Q recent financial measures of Mr. Gladstone. Within 
ad valorem a few years the spirit duties have been raised, and when 
duties. ^^ Gladstone proposed in 1860 a great reduction in the 
duty on wine, he felt that the difference between the 
duty on wine and spirits was so great that the revenue 
might be defrauded by mixing spirits with wine, anc 
importing the whole as wine. With a view of preventing 
such a fraud, he proposed to tax wine in proportion to the 
amount of alcohol it contained. The plan which was adopt- 
ed to ascertain the quantity of this alcohol was denounced 
by those engaged in the wine trade to be most vexatious; 
and they chiefly based their complaint upon the uncer- 
tainty of the tax when it was so imposed, for they affirmed 
that they never could tell beforehand the amount of duty 
which any particular wine would have to pay. It must, 
however, be admitted that such uncertainty with regard 
to taxes on commodities is exceptional, and rarely if ever 
exists, unless an attempt is made to adjust the tax accord- 
ing to some ad valorem standard. 
They are The third rule of taxation laid down by Adam Smith 
^atdl/tJie affirms that 'every tax ought to be levied at the time or 
time most in the manner in which it is most likely to be convenient 
to the con- fc>r the contributor to pay it ; ' we will therefore next 
sumer, enquire whether taxes on commodities are generally con- 
sistent with his rule. In making this enquiry it will be 
necessary to distinguish the real from the nominal payer of 
the tax; for we have already stated that the burden of 
these taxes really falls upon the consumers of a commodity, 
although the tax is generally levied from the producer or 
importer. Taxes on commodities are no doubt paid, as 
far as the consumer is concerned, at a time and in a, 
manner which is most convenient ; for the tax is in fact ' 
levied upon the consumer at the time when he pays for 
the commodity which he may purchase. But the pro- 
ducer or importer of a commodity may be called upon, in 



rr 



'axes on Commodities and other Indirect Taxes. 557 

consequence of defective financial arrangements, to pay book iv. 
the tax at a time and in a manner most inconvenient. . ^^- ^"- 
Sometimes the inconvenience just alluded to is entirely lutfre- 
due to injudicious financial arrangements; sometimes, quentlyata 
however, it is inherent in the nature of the tax ; and when ^enimtlo' 
this is the case, the tax ought not to be imposed, except t^'^^pro- 
as a financial necessity. For instance, it seems that the importer. 
duty on hops could not be levied, except in a manner 
which was most inconvenient to the growers of hops, and 
thus a strong argument was provided for the repeal of these 
duties. Hops were taxed at so much per pound, whatever 
was the quality or quantity of the crop; the tax was 
assessed immediately the crop was gathered in, and the 
hop grower was compelled to pay the duty at a certain 
definite time, whether he had sold his hops or not. The 
hop crop is so uncertain, that the grower could never 
accurately calculate how much he should be called upon 
to pay. If he was not a man of large capital, he was com- 
pelled to sell his hops, whether he wished to do so or not, 
in order to pay the duty. A too abundant crop was also a 
great disadvantage to the grower; the demand for hops 
does not vary greatly from year to 3^ear, and, consequently, 
there must be great fluctuations in the price of hops, 
since the crop of one year is often three or four times as 
great as the crop of the next year. The amount of duty 
v/hich a grower had to pay was proportionate to the 
abundance of the yield, and it therefore not unfrequently 
happened, that a large crop was most disastrous to the 
grower,' because the maximum amount of duty had to be 
paid when the price of hoj)s was extremely low. These, 
and other inconveniences, seemed to admit of no adequate 
remedy, and, therefore, the hop duties have been most 
properly repealed. 

It generally happens, that many of the inconveniences TJua incon- 
which may be connected with the time and manner of^"'^"'^"^^ 
levying a tax on a commodity can be greatly anninished 



558 Manual of Political Ecoiiomy. 

BOOK IV. by proper financial arrangements. As an example, we 
• ^^• ^'^^- . ixiay refer to the bonding houses, which offer great facilities 

avoided ly and advantages to those who import taxed commodities. 

judicious ^ merchant may not wish immediately to sell the ffoods 

arrange- . i • i p • i i • 

raents, such he imports, he IS therefore permitted to place them m 
as honding bond, and as lons^ as they remain in bond, he is not com- 
pelled to pay any duty upon them. This, no doubt, is a 
just arrangement, because the government intends that the 
consumer of the commodity should really pay the tax 
which may be imposed upon it, and, therefore, as short an 
interval as possible ought to elapse between the payment 
of the duty and the sale of a commodity; the merchant 
simply advances the tax, and if repayment is deferred, he 
will be compelled to employ a greater capital in his busi- 
ness, and the consumer will be consequently charged a 
higher price for the commodity. 
They gene- The last rule of taxation propounded by Adam Smith 

ra% ^a^e „ ^j^.j^ 'that every tax ouofht to be so contrived, as both 
more out of ' '^ ^ ' 

the i>ockets to take out, and to keep out of the pockets of the people, 
than the ^^ little as possible over and above what it brings into 
bi'ing into the public treasury of the state.' It has been previously 
treasury Stated, that any tax which is expensive to levy, will be 
inconsistent with this rule. The same remark holds true 
if a tax diverts labour from a productive to a more un- 
productive employment; if it encourages smuggling, and 
lastly, if it necessitates restrictive regulations with regard 
to the mode in which any trade or industry may be con- 
ducted. Taxes on commodities cannot, as a general rule, 
be completely free from all the faults which have been 
just described, but the faults may be much mitigated by 
proper financial arrangements. A tax, whether levied on 
a home-produced commodity, or upon one which is im- 
ported, must be expensive to collect. A great number of 
excise and custom officers must be employed to assess and 
collect the tax; and an enormous outlay is often required 
to prevent smuggling and other kinds of fraud. Smuggling 



Taxes on Cornmodities and other Indirect Taxes. 559 

is much more easily prevented in an island like our own, book iv. 
than in a country where a great extent of land frontier has « — ^-IL^ 
to be protected. The difficulty of guarding 2000 or 3000 The ex- 
miles of frontier would render the imposition of custom ^^Szow 
duties most undesirable in such a country as America, may he 
The expense of collecting a certain amount of revenue by "^^^Tldidouii 
taxes on commodities is very much diminished, if the taxes selection of 
are confined to a few articles of general consumption, for ^'■^^''" 
when a tax is imposed upon some article of limited use, 
the cost of collecting the tax is always enormous in pro- 
portion to the amount which the tax yields to the state. 
About thirty years since, our own tariff contained a list of 
300 or 400 articles, which were subject to either excise or 
custom duties. The great majority of these diities have 
been most properly repealed, and at the present time, 
tobacco, tea, coffee, sugar, and a few other articles, are 
alone subject to custom duties, and malt and spirits are 
the articles which chiefly contribute to that portion of our 
revenue which is raised by excise duties. Again, with re- 
gard to smuggling, there can be no doubt that it is much 
discouraged by the removal of extremely high duties on 
articles which contain a great value in small bulk, and 
which can therefore be readily concealed. A tax on a 
commodity may, however, in various ways which are not 
so frequently noticed, take out of the pockets of the tax 
payer an amount which greatly exceeds that which the 
tax yields to the state. 

In the first place it may be stated, that when a com- But the 
modity is taxed, the price which the consumer has to pay ^l^^^nduhi 
for it is increased by an amount which often exceeds the enhanced 
amount of the tax. Thus let us take the case of a tax {^,U,^ ^^"' 
being levied under very favourable circumstances, and 
suppose, as an example, that a retail gTocer buys so many 
chests of tea direct from bond. The amount of tea which 
he buys we may assume to be 3000^.; the value of this 
tea would not probably exceed 2000Z., if tea was admitted 



sumer. 



560 Manual of Political Ecoiiomy. 

BOOK IV. duty free, because, considering the average quality of tlie 
v.2f:J^ tea sold, the duty on tea may be estimated at fifty per cent, 
upon its value. The grocer, when he sells this tea by 
retail, will of course expect to realise the ordinary trade 
profit. This profit we will suppose to be twenty per cent. ; 
the grocer will therefore obtain 8600?. for the tea, which 
cost him 3000?., whereas if it were not for the duty, the 
grocer would be obliged to give only 2000?. for the same 
quantity of tea, and would be remunerated with the same 
per centage of profit, if he sold this tea to his customers at 
such a price as would realise for him 2400?. It therefore 
appears, that those who purchase this tea pay 1200?. 
additional for it, although only 1000?. of this amount is 
received by the government as duty. Hence, upon this 
hypothesis, the duty takes out of the pockets of the tax 
payers twenty per cent, more than it gives to the revenue 
This is the of the State. This is the most serious objection which 
7b%lthn^^ can be urged against taxes on commodities, and it is one 
against which has not been adequately considered. It must, 
TJ!^LT moreover, be remembered, that the imaginary case we 
dities. have just put, does not as a general rule adequately repre- 
sent the amount which a tax on a commodity keeps out of 
the pockets of the people, beyond what it yields to the' 
State. For instance, it has been assumed that the tea is 
purchased by the retail grocer direct from bond, but no 
doubt it much more frequently happens that the tea, after 
it is taken from bond, passes through the hands of four or 
five dealers, before it is ultimately sold to the consumer.' 
If, therefore, it is supposed that tea pays a duty of fifty 
per cent, upon its value, each of these dealers will require 
fifty per cent, more capital to conduct his trade in tea. 
The ordinary profit of trade must be realised upon the 
additional capital which is thus required to be employed, 
and, consequently, when a commodity is taxed, the con- 
sumer is generally compelled to pay for it a price which is 
increased to an extent far exceeding the amount of the duty. 



Taxes on Commodities and other Indirect Taxes. 561 

A more serious defect cannot belong to any tax tlian book iv. 
that it should take from the tax-payer an amount which ^^^JL^ 
greatly exceeds that which it yields to the revenue. This it affects to 
defect, to a greater or a less degree, accompanies all indi- ^(>^j^^ ^'^^^^ 
rect taxation ; for all indirect taxes are in the first instance commo- 
paid by the producers or importers of a commodity, who ^^^^^* 
are remunerated by the increased price which the consumer 
is compelled to pay. In every instance, some time must 
elapse between the payment of the duty and the sale of 
a commodity, and^ consequently, the trader who first ad- 
vances the tax must wait for a certain time before he is 
repaid by the consumer. But the trader is compelled to 
employ a portion of his capital to make this advance, and 
upon this capital he will expect to obtain the ordinary 
trade profit; this profit the consumer must return to him, 
in addition to the amount of the tax. This most serious 
defect, though inherent in all taxes 'on commodities, m?oy 
be very much diminished by proper precautions. Thus it 
is evident, that as short an interval as possible ought to 
elapse between the levying of a tax on a commodity, and 
the time when it is ready for consumption. On this ac- 
count it is much more desirable to tax manufactured goods 
than the ravs^ material. In order to illustrate this point 
still further, let us briefly trace the different results which 
would be produced by a tax on raw cotton, and by a tax 
on cotton goods. 

We will start with the supposition, that the two differ- lUustration 
ent taxes yield the same amount to the revenue. Let us %ly2(^l'/' 
in the first instance suppose that raw cotton is taxed, and taxinrj raw 
that a manufacturer who purchases 10,000Z. of raw cotton ^^ '^^" 
has to pay 1000^. duty. The tax, therefore, compels him 
to employ a capital of 11,000Z. instead of 10,000^. Upon 
this additional capital he will expect to realise the ordinary 
trade profit, which we may assume to be ten per cent. At 
the end of a twelvemonth we may suppose that he sells the 
goods which have been manufactured from this raw cotton 

00 



562 



Manual of Political Economy, 



or manu- 
factured 
cotton 
goods. 



The last tax 
would take 
much less 
from the 
consumer. 



Taxes on 
manufac- 
tures how- 
ever cause 
annoyance 
in other 
ways. 



to warehousemen; since, however, the duty imposed on 
the ra.w cotton has necessitated the employment of 1000^. 
additional capital, the price of these manufactured goods 
must in consequence of the tax be increased by 1100?., and 
not by 1000/., which is the amount really received by the 
government; for if this were not so, the manufacturer 
would not be adequately compensated for the capital 
employed in his business. 

Let us now make a second supposition, and consider the 
tax to be paid upon the manufactured goods. Then the 
manufacturer would not be called upon to pay the tax, 
until his goods were actually purchased by the retail dealer, 
or warehouseman, and, consequently, the tax would not 
compel him to employ a larger capital in his business. 
In this case, therefore, the price of the goods, when sold 
by the manufacturer, will not be increased by an amount 
exceeding the amount of the tax. It therefore appears, 
that a tax on manufactured goods, if it can be easily levied, 
is far preferable to a tax on raw material. It however 
not unfrequently happens, that a manufactured commodity 
cannot be taxed without subjecting the particular trade to 
the most injurious interference; for in order to assess an 
excise duty, and in order to prevent fraud, various kinds 
of restrictions with regard to the particular mode in which 
trade is carried on must be enforced, and great annoyance 
is often caused by vexatious visits of the excise officers. 
Thus few taxes on a manufactured commodity can be 
assessed and collected with greater facility than the duty 
on malt, yet maltsters are compelled to carry on their trade 
according to certain strict rules. Notice, for instance, 
must be given when the barley is to be wetted; the 
barley, when wetted, must be thrown out in a particular 
manner on the floors to be dried, and the exciseman can 
visit the malt-house whenever he pleases. Such inter- 
ference would be a still more serious evil, if some 
commodity should be taxed which involved complicated 



Taxes on Commodities and other Indirect Taxes. 563 

processes of manufacture, each of which has to be con- 
ducted according to certain rules, and to be watched by 
government officers, in order not only to prevent fraud, 
but to assess the tax. Such interference would oppose an 
insurmountable obstacle to the development of a branch 
of industry, for all that enterprise would be checked which 
stimulates the introduction of machinery, and other in- 
dustrial improvements. 

The remarks which we have hitherto made in this Question of 
chapter have been restricted to the import duties and to ports. ^^' 
the excise duties that are imposed upon the commodities 
which are consumed in the country; the government, in 
fact, intends that the burden of these taxes should fall on 
the consumers. It is, however, manifest that various 
commodities which we export maybe also taxed; we have, 
however, been induced to consider separately the operation 
of export duties, because these duties are imposed with the 
view of making foreign countries contribute to our own 
revenue. It would not be appropriate, in a treatise on 
jDolitical economy, to enquire whether the relations which 
ought to prevail between different countries would justify 
us in the attempt to make foreigners contribute to the 
ex23ense of our own government. In fact, we do not know 
how such a question can be decided, because a complete 
code of international morals has not as yet been pro- 
pounded, much less recognised. Political economy can 
however perform a useful service by proving that an 
export duty is seldom entirely paid by the foreigner; 
contrary to popular opinion, it almost invariably happens 
that, in attempting to tax the foreigner, we tax ourselves 
to as great, or even a greater extent. 

We cannot discuss the operation of export duties with- J^ffccts of 
out recalling to our reader's mind many of the principles duty such 
which were established with re^rard to international trade. «« ^^'« duty 

• OTt COGLiS 

We proved whilst investigating that subject that there i^ proposed by 
a constant tendency in operation to make the exports of a 

002 



564 Manual of Political Economy, 

BOOK IV. country pay for its imports, and in considering the trade 
> — 1, — 1/ between two countries, we proved that the amount of 
profit which, each country derives from interchange of 
commodities varies inversely with the demand which the 
one country has for the products of the other. Let us, 
therefore, bear these principles in mind w^hen tracing the 
effects of an export duty. One of the most recent export 
duties that has been proposed was an export duty upon 
Mr. Hots- coal; this financial measure was warmly advocated by Mr. 
man. Horsman in 1860, and was received with some favour. Let 

us assume that a duty of 2s. was levied upon each ton of 
coal exported. The price of English coal in foreign 
countries would in consequence of the tax be increased 
two shillings per ton. The demand for commodities 
always varies inversely with their price, and therefore this 
increase in the price of coal would diminish the demand 
for English coal in foreign countries. The export of coal 
from England would consequently be diminished; the 
decrease in the export would be greater with regard to 
some countries than with regard to others. France, for 
instance, purchases coal from Belgium, and if Belgian 
coal remained untaxed, France might probably cease to 
import coal from England if our coal was subject to an 
export duty. It therefore appears that the first result of 
any export duty would be to diminish the amount of our 
export trade. The commodities which were subject to an 
export duty would decline in 23rice to the home consumer 
in consequence of the foreign demand for them being 
Its ap- checked. It might therefore seem that an export duty on 
parent ad- g^^|^ ^^ article as coal would confer two great advantages 

'Vantages. p ^^^^^ 

on the general body of the tax-payers; in the first place, 
it would cause foreigners to contribute to our revenue, 
and thus relieve us of a portion of our taxation; secondly, 
the price of coal would be reduced, and this would be 
advantageous to the nation at large. 
A partial It may, iio doubt, be urged as a set-off to these apparent 



Taxes on Commodities and other Indirect Taxes. 565 

advantages, that the coal trade would suffer in consequence book iv. 
of this diminution in the export of coal, and that the ^ — \r-~^ 
owners of collieries would realise smaller profits, oy^ing set-off to 
to the fall in the price of coal. It may, however, be re- ^^^^• 
joined, that the loss which thus accrues to those engaged 
in a particular branch of industry is more than compen- 
sated by the advantages which we have shown would be 
conferred upon the general body of the tax-payers. But an 
important point still remains to be determined, for we 
have not yet remarked upon the effect which might be pro- 
duced upon our import trade, if our exports were checked 
by the imposition of a duty. 

In order to investigate this question we will continue Investiga- 
our supposition that an export duty upon coal has caused ^^£'^,*^'^^^^^ 

•^ -*■ . , -»■ J i. effects irro- 

France to cease importing coal from oiir own country, duced on 
It has been already proved that exports pay for imports ; J'^^'^"^2'o^^ 
it is, therefore, manifest that if the export trade of a 
country is diminished, the amount of her imports must 
also be diminished; this must be so, because the commo- 
dities which are exported pay for those that are imported. 
Such a decrease in the foreign trade of a country must 
diminish national wealth; since it has been shown that 
foreign commerce increases the efficiency of labour and 
capital, by enabling each country to apply itself to those 
branches of industry for which it possesses the greatest 
natural advantages. It, therefore, appears that the ques- 
tion, whether or not an export duty is advantageous as a 
financial measure, must be mainly determined by the 
circumstances of each special case. For instance, it is 
quite possible that an export duty may entirely prevent the 
export of a commodity; this would no doubt be the result 
if an export duty was in this country imposed uj)on silk 
manufactures. The competition between France and 
England in the silk trade is extremely keen ; on the one 
hand, France has cheap labour, and her clearer climate is 
supposed to give a superior colour to her dyes. On the 



566 Manual of Political Economy. 

other hand, England can perhaps manufacture more eco- 
nomically, because she possesses more perfect machinery 
and cheaper fuel. It is consequently difficult to decide 
whether France or England can sell silk goods to foreign 
countries at the cheapest rate. It is, therefore, evident that 
the imposition of even a small export duty upon English 
silks would, as far as this branch of industry is concerned, 
completely drive England from foreign markets. The 
prosperity of an important branch of industry would thus 
be imperilled, and an export duty under such circum- 
stances would be most disastrous and most indefensible. 
Effects of We will next consider a much more favourable case for 
dutu^m- ^^^ imposition of an export duty. It cannot be disputed 
■posed upon that the United States have hitherto possessed a natural 
7lie^Umted Hionopoly for the growth of cotton. No other country has 
States. been able to produce cotton of so good a quality at so 
cheap a rate. Let us, therefore, trace the consequence 
which would have ensued if a small export duty, say of 
a halfpenny or a penny per lb., had been imposed upon 
American cotton. Even so small an export duty as this 
would have yielded a considerable amount to the revenue 
of the United States. Foreign countries who purchased 
American cotton would of course be compelled to pay this 
duty, and it will therefore be instructive to enquire^ whether 
such a financial measure would in any way have prejudi- 
cially affected the material interest of the United States. 
The first effect of such a duty would manifestly be to raise 
the price of American cotton in all countries which import- 
ed by an amount at least equivalent to the duty. If the 
duty was a penny per lb., England would be compelled to 
pay sixpence instead of fivepence per lb. for American cot- 
ton. It may be perhaps thought that this rise in the price 
of American cotton would induce England to obtain cotton 
from other sources of supply; this, no doubt, would be so, 
if other countries possessed the same advantages for the 
production of cotton as America. It therefore follows, as 



Taxes on Commodities and other Indirect Taxes. 567 

Ave have before stated, that it would be most disastrous to book iv. 
impose an export duty either on a raw or manufactured • — v— ^ 
commodity, if the commodity could be produced on as 
favourable terms by other countries as by the country 
which imposes the export duty. But with regard to 
cotton, the present civil war in America has proved that, 
without the United States, it is impossible for England 
and other countries to obtain the quantity of raw cotton 
which they require. The available supply from other 
sources is in fact so limited, that a rise in the price 
amounting to 200 or 800 per cent, fails to bring us so 
large a quantity of cotton as we are willing to jDurchase 
at even these high rates. Until, therefore, the resources 
of India and other countries are more fully developed, it 
cannot be supposed that we should resort to other coun- 
tries for raw cotton if the United States imposed a small 
export duty upon this material. The rise in the price oi ^'^ch a duty 
cotton which would be caused by this duty would of course ''slriously 
slightly diminish the quantity of cotton which such a coun- f#fc« the 
try as England would purchase. If the English manufac- manufac- 
turers have to pay a higher price for raw cotton, they must ^^^'^^ ^<>^- 
charge a higher price for manufactured goods, and if the ' 
price of cotton goods is increased, the demand for them will 
be diminished. But a very slight rise in the price of 
cotton goods would be sufficient to compensate the manu- 
facturer for a rise in the price of the raw material, and so 
slight a rise in price would exert but little influence upon 
the demand for a commodity which is not used as a 
luxury, but which serves to provide one of the necessaries 
of life. It is impossible to predict the position which the 
cultivation of cotton may occupy at the conclusion of the 
present American civil war. The United States had, 
for some time previously, possessed a natural monopoly 
for the growth of cotton, and it appears to us that, as long 
as this natural monopoly continued, the imposition by the 
United States of a small export duty upon raw cotton 



568 Manual of Political Economy. 

BOOK IV, would have been politic, considered merely as a financial 

- ^^•^ "'- . measure. Altliougli, in the special case which has been 

and might, just investigated, we have spoken somewhat favourably 

Teotional ^^ ^^ export duty, yet it must be borne in mind that 

case, he we distinctly based our remarks on the fact that the 

polit^^ '^ United States possessed, with regard to the growth of 

cotton, a natural monopoly. This, therefore, is quite an 

exceptional case : an export duty would almost invariably, 

as we have shown in a previous example, jeopardise the 

export trade of a country, and thus diminish the national 

wealth. If such a result occurs, it is hardly necessary to 

repeat that an export duty is impolitic, and must prove 

disastrous. 

Import^ "We have hitherto, in this chapter, considered that import 

duties im- i,. • i_£»;i i pij."* 

posed for duties are imposed lor the sole purpose 01 obtammg 
the sake of revenue for the State. But until a very recent period it 
v/as almost universally believed that another most impor- 
tant end was attained by import duties. Twenty years 
since the theory of protection was as generally accepted 
in this country as it is now discarded. In America, in 
France, and in most continental countries, the great ma- 
jority of politicians are even at the present day ardent pro- 
tectionists. It is, therefore, still extremely important, as a 
practical question, to investigate the effects of import duties 
when they are imposed for the double purpose of obtain- 
ing revenue, and of protecting native industry. It is quite 
evident that an import duty can be easily arranged so as 
to obtain the double object. We have already, for in- 
stance, alluded to the closeness of competition in the 
silk trade, between France and England. If, therefore, 
a small import duty, say of five per cent., should be placed 
upon French silks, and if at the same time English silks 
should be subject to no excise duty, it is manifest that 
French silks would probably be almost entirely excluded 
from the English market. A similar end might be at- 
tained with regard to all other imported commodities. 



Taxes on Commodities and other Indirect Taxes. 569 

It is consequently possible to limit, or altogether stop the book iv, 
importation of a commodity, by subjecting it to a suffi- « — ^v — ^ 



ciently high import duty. 

The principles which have been established with regard ^protective 
to international trade clearly prove the loss which the always 
nation suffers if protective duties either prevent or check 'involves a 

, . . (. , . . ^Tf,, , . . , waste of 

the importation 01 commodities. When trade is carried capital and 
on between two countries, the wealth of each is increased, ^«^ow. 
because each country is enabled to apply its labour and 
capital to those branches of industry for which it pos- 
sesses the greatest natural advantages. Thus reverting to 
our previous illustration, it has been assumed that the 
cost of growing corn, compared with the cost of producing 
iron, is much less in France than in England. We have, 
for instance, made a supposition, which is by no means 
hypothetical, that a ton of iron costs as much to produce, 
in France, as twenty sacks of wheat; whereas, in England, 
a ton of iron would only be equivalent in value to twelve 
sacks of wheat. We can, therefore, readily perceive the 
loss which France and England would both suffer if pro- 
tective import duties imposed in France upon English 
iron should prevent the importation of English iron into 
France, and if protective duties imposed in England upon 
corn should prevent the importation of French wheat 
into England. Such a protective tariff would cause labour 
and capital to be wasted, or, in other words, would deprive 
them of a part of their productive powers. Twelve sacks 
of wheat cost England as much to produce as one ton of 
iron ; but if the trade between England and France were 
unrestricted, -England might divert a portion of her labour 
and capital from the growth of wheat to the production of 
iron for France; it would be manifestly greatly to the 
advantage of France to give England sixteen sacks of 
wheat for each ton of iron. Hence, unrestricted trade so 
much increases the wealth of a country, that a certain 
amount of labour and capital, which before would only 



570 Manual of Political Economy. 

BOOK IV. obtain twelve sacks of wheat, now produces a ton of iron, 
' — ^ ' . in exchange for which a foreign country will willingly 

give sixteen sacks of wheat. 
Protection- The argument which we have just adduced, considered 
ms^losT^ in conjunction with the remarks which have been made 
and point upon international trade, may be regarded as conclusively 
'temporary demonstrating the injurious effect which is produced upon 
evils in- the nation by protective duties. Protectionists, however, 
home il^'^^ ^S^^^^ this loss of national wealth; they advocate the 

dastry by protective System, because they conceive that, without its 
free trade. , •ti ^ r • i , iii 

support, some special branches oi industry would be un- 
able to compete against foreign countries. It might, for 
instance, be argued that it would be impossible for the Eng- 
lish farmer to compete against the French farmer, if wheat 
can be grown at a much cheaper rate in France than in 
England; on the other hand, it would be equally impos- 
sible for the French iron-master to compete against the 
English iron-master, if, cheap English iron is freely im- 
ported into France. It is, therefore, plausibly argued 
that free trade is a dangerous experiment if it should 
cause the agricultural interest to be ruined in England, 
and the iron interest to be ruined in France. It can, 
however, be easily shown that no class of traders can 
either be permanently benefited by protective duties, or 
permanently injured by free trade. Landowners are the 
only class that can derive a lasting advantage from pro- 
tection. Property in land may be described as the posses- 
sion of a natural monopoly. The value of this natural 
monopoly may be artificially -raised by protection, but 
other considerations, which we shall proceed to mention, 
will almost invariably deprive even the landowners of 
this possible special advantage. 
A con- We msij consider in what manner the position of the 

sideration j^j^glish farmer was affected by the corn laws, in order to 

of free ° -^ 

trade in prove that no class of traders can be permanently benefited 
corn m ^^ protective duties. The restrictions which the corn 



Taxes on CommoditiGS and other Indirect Taxes. 571 



laws imposed upon the importation of corn no doubt book iv. 
increased its price in this country; it was therefore con- «_2^:^^ 
eluded that protection, because it increased the price oi England 
corn, conferred a special benefit upon the English farmers. J-f ^^'fjjf 
It must, however, be borne in mind that permanent low peo-manent- 
prices are as advantageous to the English farmer as per- l^y^li^^^ 
manent high prices. In a country like our own, where of Engiiah 
there is great commercial enterprise, the competition of 
capital is constantly exerting a tendency to equalise profits 
in different trades. If the price of all agricultural pro- 
duce should be doubled, the farmer's gross returns would 
cceteris paribus be doubled; his profits therefore would 
be enormously augmented, if he were able to appropriate 
to himself all these additional returns. But if the profits 
of the farmers, or of any other class of traders, should be 
greatly increased, an active competition for farms would 
be at once stimulated, the rent of land would consequently 
rise, the profits of the farmer would soon be reduced to 
their former amount, and thus the landowner, and not 
the farmer, would be ultimately benefited. Again, if the 
price of agricultural produce should be reduced by foreign 
importations, the profits of the farmer might be greatly 
diminished; traders, however, will cease to continue a 
business if they are unable to realise from it the ordinary 
rate of profit. Landowners will, consequently, be obliged 
to submit to a reduction of rent; hence, it is not the 
farmer, but the landowner, who would ultimately suffer. 
Of course, farmers may be temporarily benefited by a 
sudden rise in prices, or temporarily injured by a sudden 
fall. For instance, many farms are let on lease, and 
the rent of such farms cannot therefore be either imme- 
diately raised or immediately lowered. When, moreover, 
the profits which are realised in a particular trade are 
affected by a sudden change of prices, a considerable time 
must elapse before the trade is again restored to its 
normal or steady condition; during this interval the trader 



572 Manual of Political Economy, 

BOOK IV. may either secure exceptionally great gains, or may have 
-^ ' ^ ' . to submit to an unusally low rate of profit. 
Free trade We have proved, as a possible theoretical result, that 
might cause -^Q landowners may be iniured by the abolition of pro- 

temporary . . nm • t-ii t-t 

injury to tective duties. The experience which has been derived 
land- from the introduction of free trade into this country has 

owners; . . '^ 

hut, in shown that the landowner will generally receive conipen- 
practice, ^^^qj^ {^^ various ways. The rent of land has, no doubt, 

can rarely , , «^ , .... 

produce in this couiitry, rather increased than diminished since 
that effect, ^j^^ passing of free trade; this fact may be readily ex- 
plained, for although the price of wheat has been reduced 
by foreign importations, yet a more than corresponding 
rise has taken place in the price of other kinds of agri- 
cultural produce. Meat, dairy produce, and even barley, 
are much dearer now than they were previous to the 
repeal of protective duties. It must moreover be remem- 
bered, that the rise in the jorice of these articles is in a 
great measure due to free trade. Our commerce, released 
from the trammels of protection, has expanded in the 
most extraordinary manner. An annual augmentation in 
our export trade amounting to 70,000,000^. represents 
an enormous addition to the accumulated wealth, or, in 
other words, to the capital of the country; but if the 
capital of the country is augmented, the wage-fund must 
also be increased, and thus the additional wealth which 
has been created by unrestricted commercial intercourse 
has been distributed amongst the nation at large. The 
. people, having in this way been made wealthier, consume 
a greater quantity of meat, dairy produce, and beer. Meat 
and dairy produce are expensive to import, and barley, 
after being for a length of time in the hold of a ship, 
does not make good malt. Hence these commodities have 
all greatly risen in price ; farmers are consequently now 
able to pay higher rents than they could when they were 
protected by prohibitive duties, and growing prosperity 
for the landed interest has been substituted for the im- 



Taxes on Commodities and other Indirect Taxes. 573 

pendino- ruin which was so often gloomily predicted by book iv. 

■•^ ? . , CH. III. 

protectionist statesmen. « v ' 

Foreign competition may, no doubt, cause some parti- Particular 
cular branches of industry to be altogether relinquished, ^^^f^^^^^ ''^ 
if the industry has been artificially sustained and fostered may suffer 
by protective duties. As an example, it may be men- {^^^^^'^^^^^^ ^ 
tioned that this country, following the example of France, time, but its 
might have imposed high import duties upon sugar, with '^^^f^^^^ 
the view of encouraging the home manufacture of sugar be bene- 
from beet-root. A home sugar interest of great import- -^^^^^^ 
ance might thus have been artificially created; if, how- 
ever, the support of protection should be removed, it 
would be impossible for the producer of home-grown sugar 
to compete against the foreign importer; this particular 
department of native industry would therefore be imme* 
diately destroyed. Such a* destruction of a branch of 
industry may be perhaps regarded as most disastrous, 
because it may be thought that labourers would be thrown 
out of employment, and capitalists would be deprived of 
an eligible investment for their capital. The labourers 
eno-aged in one particular kind of industry no doubt 
suffer a temporary loss if they are compelled to relinquish 
the labour to which they are accustomed; each branch of 
industry requires some special skill or knowledge, and 
consequently those who are compelled to engage in a new 
kind of ktbour lose the advantage of their acquired skill. 
Again, employers always suffer a certain amount of loss if 
they are obliged to relinquish the industry to which they 
are accustomed; they also possess a special knowledge, 
which they must to a great degree sacrifice, and capital 
cannot be transferred from one employment to another 
without considerable v/aste. In every branch of industry 
there is a large amount embarked in the form of fixed 

o 

capital; machinery, buildings, and plant, cannot be con- 
verted to a new use without involving great expense. These 
temporary disadvantages may no doubt accompany the 



574 Manual of Political Economy. ' 

BOOK IV. removal of protective duties, but an abundant compensation 
> ^^•/"•. is provided by the great benefits which are sure ultimately 
for it can- to result from free commercial intercourse. The general 
not he a loss }^q^y of the consumers are provided with cheaper commo- 

to Q CO'KTifl'*'!! XX. 

to import dities, and the wealth of the country must be increased, 
commodi- ]3ecause labour and capital are both rendered more pro- 
of pro- ductive. The principal argument which foreign protec- 
ducing tionists still urge against free trade would be removed, if 
it is once clearly perceived that it cannot be any loss to a 
country to import commodities instead of producing them. 
If commodities are imported, commodities of an equivalent 
value must be exported to pay for those which are imported. 
If, therefore, the introduction of free trade causes a nation 
to purchase commodities, instead of producing them her- 
self, the aggregate wealth in the country cannot be dimi- 
nished — labour and capital are simply transferred from 
one industry to another; since, if a greater amount of 
commodities is purchased from foreign countries, a larger 
quantity must be also produced at home, in order to 
supply the increased exports which pay for these addi- 
tiona^l imports*. 

* The political events wMcli are occurring at the present time (the 
autumn of 1864) in one of our Australian Colonies, plainly prove that the 
fallacies of Protection are ever liable to be revived in all their pristine 
vigour. A General Election has just occurred in the Colony of Victoria, 
and a promise to impose protective duties was the chief feature in the 
Ministerial programme. The old battle between Protection and Free Trade 
has been fought out on the hustings in this, our most prosperous colony, 
and the Protectionists have achieved a most decisive triumph. If these 
colonial ministers fulfil their electioneering pledges, a protective tariflf will 
be immediately introduced sufficiently onerous to prevent British merchants 
sending exports to this colony. The Melbourne correspondent of the 
"Times," whose letters are always as able as they are interesting and 
instructive, tells us that the protectionist party defend their conduct by 
quotations from the works of many political economists, including, amongst 
others, Mr. J. S. Mill. It is scarcely necessary to say that Mr. Mill has 
explained the mischievous fallacies of protection as clearly, and probably 
more clearly, than any other living writer. The Colonial protectionists 
maintain that he supports their views, because in one passage of his 'Prin- 
ciples of Political Economy' {vide Book v. Chap, x.) an opinion is expressed, 
that in the case of a young colony, a protective duty may occasionally be 
wisely imposed, if it can be clearly shown that this artificial encouragement 
may cause some branch of industry to be permanently and prosperously 



Taxes on Commodities and other Indirect Taxes. 575 

In the present and preceding chapters we have briefly ^°°^^ 
reviewed the chief circumstances connected with direct 

establisbed in ii colonj'-, and if it can also be sbown that this branch of 
industry might never have been introduced, if it had not been first stimulated 
and fostered by protection. Mr. Mill makes this exception in favour of a 
protective duty, because he supposes that any industry when first established 
in a colony has always to struggle with peculiar difficulties. The colony 
therefore will be placed under a great disadvantage, if it has to compete 
with a country in which some particular industry has been carried on for a 
long period. Tiie colonial trader "will relinquish this unequal struggle unless 
he receives some assistance from the State in the form of protection, and 
thus many different kinds of industry, for the successful prosecution of which 
the colony may perhaps have peculiar advantages, will be virtually banished 
from the colony. We think we have now presented the arguments of the 
Colonial Protectionists in their most plausible and favourable form. Mr. 
Mill has no doubt put a strong case, if we assent to the hypothesis upon 
which it is based. But in our judgment he has over-stated the peculiar 
difficulties which an industry has to contend with, when first introduced 
into a new colony. Australia has purchased from England nearly all the 
manufactured commodities she requires instead of producing them herself, 
because in England labour, machinery and fuel are cheaper than they are 
in Australia. It seems to us that there is no reason why these circum- 
stances, which give to England a superiority'" in manufacturing industry, 
should act with less force if the Australians are induced to form manu- 
facturing establishments by the promise that British goods shall be excluded 
from their markets. As long as labour, machinery and fuel continue to be 
so dear in Australia, that it is cheaper to buy goods in England and also 
pay in addition the cost of carrying them 12,000 miles, it cannot be supposed 
that manufacturing industry will thrive in this colony. But if in the course 
of a few years, the economic condition of Australia shoiild change ; if, for 
instance, labour should become so much cheaper in that country, that 
woollen or cotton goods could be made there cheaper than they could be 
imported from England, then it appears to us quite certain that woollen and 
cotton manufactures would thrive in Australia, and that their progress will 
not be impeded by any special difficulties, which are so formidable that they 
can only be vanquished by a protective tai-ifF. 

It seems to us most remarkable that this clamour for protection should 
have arisen in a community where the wages paid are higher than those 
which are received by the labourers of any other country. Moreover, in 
Australia the position of the capitalist is as satisfactory as is that of the 
labourer, for in previous chapters we frequently have remarked that in 
Australia fertile land is so abundant, and as a consequence the production of 
wealth is earned on under such advantageous conditions, that profits as well 
as wages are both extremely high. It is therefore evident that the various 
kinds of industry which flourish in that colony must be singularly re- 
munerative, and the community must incur a serious loss if protective 
duties should artificially stimulate certain trades, which would be less pro- 
ductive of wealth in proportion to the labour and capital invested in them, 
than are the various brandies of industry which are now carried on. Hence 
here, as in every other case, protection would exert a mischievous tendency 
to cause labour and capital to be transferred from one industry to some 
other which is less productive of wealth. In Australia the accumulation of 
wealth may be augmented almost without any assignable limit, if a sufficient 



57<^ 



Manual of Political Economy. 



A compari- 
son is fre- 
quently 
made he- 
Uveen direct 
and in- 
direct tax- 
ation. 



Such 
general 
compari- 
sons are 
futile. 



and indirect taxation. Writers on taxation usually make 
a comparison of these two different systems, and attempt 
accurately to balance the advantages and disadvantages 
of each. We think, however, that it is impossible fairly 
to make such a comparison, and the attempt may possibly 
lead to some rather mischievous resiilts. For instance, 
if it can be shown that direct taxation is more in accord- 
ance vfith Adam Smith's four rules than indirect, the 
proposition is at once hastily propounded that the whole 
revenue of the State ought to be raised by direct taxa- 
tion. We have intended that our remarks should prove 
the evil consequences which would be produced if such 
a proposal were carried into |)ractical effect. The chief 
object, in fact, which we have had in view, has been 
to explain that direct and indirect taxation are both 
respectively accompanied with certain defects and ine- 
Cjualities which can only be partially remedied. Now it 
is impossible to decide with certainty, whether the defect 
which may belong to a direct tax is comparatively of 
greater moment than another defect which may be inse- 
parably connected with a tax on a commodity. Thus an 
income-tax may be reasonably objected to on two distinct 
grounds : in the first place, it taxes savings, and therefore 
discourages the accumulation of capital; in the second 
place, it cannot be accurately assessed with regard to 
certain classes of incomes. All taxes on commodities are, 
however, subject to certain imperfections which are, as it 
were, peculiar to this particular kind of taxation; thus a 
tax on a commodity can be seldom made ad valorem, and 
therefore such a commodity as the tea which is purchased 
by a poor man is far more highly taxed than the tea which 
is purchased by the rich. What test therefore can we 
have, which will enable us to decide whether the inequal- 

supply of labour is fortlicoming ; and the Protectionists in that country 
should not lose sight of the fact that their policy will make imported com- 
modities dearer, and will thus diminish the adyantages which a labourer 
will derive from emigrating to that colony. 



Taxes on Commodities and other Indirect Taxes. 577 

ity consequent upon the difficulty of making taxes on book iv. 
commodities ad valorem, is of more serious moment than ^ ^^•^"^- , 
the discouragement which an income-tax places on the 
accumulation of capital ? 

It should moreover be remembered that some particular An ad- 
section in the community must suffer as it were a special ^^^^^^^ (^ 

*^ _ ■•• _ either kind 

injury, if the incidence of a tax is unequal and unfair, of taxation 
Inequality of taxation really signifies that a tax takes an ^^^l^^^^f^:! 
undue amount from some one class ; it is therefore evident duce bad 
that all the particular defects which belong to each tax ^Jj^^^^- 
would be intensified, and would produce a concentration 
of inequality with regard to some one class of the com- 
munity, if any tax should be so greatly increased that a 
large part of the revenue should be raised by it. For 
instance, the advocates of direct taxation would repeal 
most of the existing taxes on com^modities, and would 
substitute an income-tax in their place. An income-tax 
of DS. in the pound would thus be probably required, and 
such a tax could not be raised >7:+hout increasing the evil 
consequences of an income-tax in a far greater ratio than 
the increase in the amount of the tax. Thus it is probable 
that our present income-tax does not to any serious extent 
discourage the accumulation of caj)ital. But an increase 
of the income-tax to 5s. in the £ would so powerfully 
check the ac^amulation of capital, that the production of 
wealth would be greatly diminished, and the wage-fund of 
the country would also be so much decreased, that the wages 
of the labourers would be considerably reduced. Again, 
if the chief part of the revenue of the State was raised by 
an income-tax, the inequality of taxation would be greater 
than any existing at the present time, since certain classes, 
such as traders and manufacturers, can escape a portion of 
the tax without much fear of detection. We therefore 
think, that all the proposals that are advanced by amateur 
financiers to govern the taxation of the country by certain 
theories, are not only unsound in principle, but would 

PP 



578 



Manual of Political Economy, 



BOOK IV. greatly increase the inequality of our present fiscal system. 
. ^^l ^"'^ We, in fact, incline to the opinion, that the present mode 
The present of obtaining the revenue of the country cannot, with ad- 
modeof yantao^o, be subiect to any radical chang^e. We have 

tcXXOitlOTh o ' o «/ o 

cannot he endeavoured to show, that a moderate income-tax is not 
radically j^^^Q^g obi* ectionablo than a tax on commodities, and we also 

eJianged ."^ . 

idih ad- think that the best commodities to be taxed are taxed at 
vantage, ^^iq present time. In the first place it may be observed, 
that we tax commodities of the most general consumption, 
and thus obviate the necessity of subjecting a great number 
of articles to customs and excise duties. With the excep- 
tion of tea, the most heavily taxed articles are such 
luxuries as tobacco, spirits, beer, and sugar; moreover, 
the excise duties which a.re imposed do not seriously 
interfere with the successful prosecution of any branch of 
industry. It must, however, be borne in mind, that when 
we speak thus favourably of our present fiscal arrange- 
ments, v/e express no opinion as to the necessity of our 
present large national expenditure. This question, as we 
have before said, must be decided by the politician, and 
not by the political economist. 



579 



CHAPTER lY. 

ON THE LAND-TAX AND POOR-RATES. 

TFIHE taxes which we propose to consider in this chapter' book iv. 
1 are, a land-tax, and a tax imposed for the reUef of the . ^'^■ J^- ^ 
poor. We discuss these taxes in a separate chapter, be- Peculiar 
cause a land-tax differs in its incidence from all other ^^i^ure of a 

7(77) fj ' fOOT 

taxes, and the tax which we levy in this country for the 
relief of our poor indirectly produces many important 
results, which ought to be carefully considered. 

The first of these taxes possesses a special practical impoHance 
importance at the present time, for although a very insig- ^^ ^^^^ jf' 
nificant portion of our own revenue is obtained from the dia. 
land-tax, yet the principal part of the revenue of our 
greatest dependency, India, is provided by the taxes which 
are imposed upon land. The nature and incidence of the 
land-tax will be clearly understood, if we reflect upon the 
mode in which the dominion of Great Britain was estab- 
lished in India. The British traders who first settled in 
that country found it governed by a great number of 
petty rulers, who owned the soil, and derived their revenue 
by making their subjects pay a rent, or tax, for permission 
to cultivate the land. The dominions of these native 
rulers were obtained by the English, either by annexation, 
or by conquest ; and, consequently, our government 
gradually became possessed of a great portion of the soil 
of India, and could exercise over it the same rights of 
property as those which an English landlord exercises over 

p p2 



580 Manual of Political Economy, 

BOOK IV. his ovm estate. The government in India takes the place 
v_f?;i!L of individual landlords, and the cultivators of the soil rent 
The land- their land from the government instead of from private 
tax is often landowners, It, therefore, appears that there is no real, 
nature of hut simply a nominal distinction between a land-tax and 
rent. TQnt, for we have already said, in a previous chapter, that 

rent is the price which is paid for the use of an appropri- 
ated natural monopoly. If land has been appropriated 
by the government, then the price paid for the use of this 
appropriated natural monopoly is received by the govern- 
ment, and is termed a land-tax. If, however, the price is 
paid to a private individual, then it is termed rent. 
The land- From these considerations it is evident, that as far as 
tax does ^j^^ cultivators of the soil are concerned, it can be a matter 

not injure 

the cultiva- of no consequence whatever to them, whether they pay a 
tors of the j^nd-tax to the government, or whether they pay rent to 

sot Cm ^ 

private landowners. Hence a land-tax is no burden upon 
the cultivator, nor does this impost cause any loss to the 
rest of the community. It therefore follows, that a land- 
tax, as long as it does not exceed a rack-rent, cannot in- 
crease the price of products raised from the land, for those 
who grow the products would not sell them cheaper if 
they paid rent to a private landlord, instead of paying the 
same amount to the government in the form of a land-tax. 
A land-tax consequently differs from all other taxes, for it 
possesses the excellent quality of providing a large revenue 
for the State without diminishing the wealth of any class 
in the community. Those, therefore, are completely in 
eiTor, who quote the aggregate amount of taxation which 
is raised in India, in order to prove how heavily the people 
of that country are taxed. At least 19,000,000^. per annum 
is obtained in India by the land-tax, and it w^ould be as 
unreasonable to consider this amount as a burden laid 
upon the people, as it would be to consider that the whole 
rent which is paid to English landlords in this country is 
an impost levied upon the cultivators of the soil. 



Oil the Land-Tax and Poor- Rates. 581 

It is, however, quite possible tliat a land-tax may exceed book iv. 
a rack-rent in amount, and the tax would, in this case, , ^^-^^J- , 
increase the price of agricultural produce. Suppose, as iftheland- 
an example, that our ofovernment should arbitrarily take ^^^ exceeds 

^ o . '^ a rack-rent 

possession of all the landed property of this country, ihe in amount 
Endish farmer would then rent his land from the State, *^/«'^«'^.^«««c 

.... , . . "^e price of 

and not from private individuals ; the position of the culti- agricxdtv,- 
vator would manifestly be unaffected by this unjust spolia- T, -^''''' 
tion of property if rents were determined then, as now, by 
competition. The same rack-rent would, in fact, be paid 
by the farmers, and the price of agricultural produce need 
in no way be influenced by such a transfer of property. 
But let us enquire what would occur if the government 
resolved to levy a greater rent, in the form of land-tax, 
than the rack-rent which the cultivator previously paid. 
Let us, for instance, assume that the government levies 
500^. a year in land-tax from a farmer whose rent had 
been previously 400^. a year. Now it will be remembered 
that a rack-rent is the price which is paid for the use of 
land when rents are determined by competition. Since, 
therefore, free competition of capital is supposed to exist, 
the farmer, after paying a rent of 400^. a year, will realise 
on the average of years the ordinary rate of profit upon 
his labour and capital. The extra 100^. a year which it is 
assumed the government attempts to levy from him, he 
cannot afford to pay; or, in other words, the payment of 
this additional sum will prevent him realising the ordinary • 
rate of profit upon his labour and capital, unless he should 
be compensated by a rise in the price of agricultural 
produce. No class of traders will, however, continue an 
occupation if it is permanently less profitable than other 
branches of industry ; hence it is impossible for a land-tax 
to exceed a rack-rent in amount without producing a rise 
in the price of agricultural produce. It therefore follows 
that all that portion of a land-tax which exceeds a rack- 
rent in amount is really contributed by the consumers of 



582 Manual of Political Economy. 

BOOK IV. agricultural produce, since the price of such produce is 

CH. IV. . 1 

^ , ' increased. 

A land-tax Other considerations show, that when a land-tax exceeds 

wJiich ex- ^ rack-rent in amount, a counteractino;- influence is brouofht 
ceeas a . . .... 

rach-rent into operation which diminishes the aggregate revenue 

tends to which the land-tax yields. For it is evident that the im- 

throw the , ^ "^ 

soil out of portation of agricultural produce will be encouraged, if the 

cultivation. ^^{^^ ^f g^^.]^ produce is artificially raised in the home 

market by an excessive land-tax. But if an increased 

amount of produce is imported, a diminished quantity of 

produce will be grown in the country itself Directly, 

therefore, adand-tax is greater in amount than a rack-rent, 

a tendency is exerted to -throw land out of cultivation. 

This tendency will continue if the land-tax is increased, 

and thus the area of land from which the tax can be levied 

will be gradually restricted. 

The land- The land-tax which exists in our own country forms only 

^EnaUnd ^ ^^^^ Small part of the rent which is paid to private land- 

m%ly denotes lords. Such a tax should properly be considered to denote 

State ^^ ^^^^ ^^® State has reserved a small pecuniary share in the 

retains a ownership of the soil. The relative value of the shares 

77 

^interest in which the landowner and the State respectively possess was 
the soil. very different formerly from what it is now. The land-tax 
in our own country has long since been commuted for a 
fixed money payment, and the tax has consequently not 
increased with the enormous advance in the value of 
landed property. As far as the cultivator is concerned, it 
makes no difference whether he pays the land-tax or not, 
because if it is arranged that the tax should be levied from 
him he manifestly pays so much less rent to the landlord. 
As we have before said, such a land-tax as that which 
exists in -England merely denotes the fact, that the State 
possesses a certain pecuniary interest in the soil ; and it is 
therefore evident that both the profits of the cultivator 
and the price of agricultural produce must be the same 
whether the land-tax exists or not : or, in other words. 



071 the Land-Tax and Pooi^-Rates. 583 

whether the State has, or has not, reserved for itself a eook iv. 
certain right of property in the soil. It might therefore — 1^ — '-^ 
have been a fortunate circumstance for the nation if the 
land-tax in this country were greater in amount than it is 
at the present time. It would now, however, be an unjust An aug- 
confiscation of property to increase the land-tax; such ^'^'"oUlillcmd- 
augmentation of the tax would be paid entirely from the tax now 
rent of landowners, and would therefore be as indefensible -^^^ ^/^^ 
as any other impost levied upon one special class. But ^«^cZ- 
it would have been a boon to the tax-paying community 
if, when the land-tax was first imposed, its amount had 
been fixed not at a certain sum of money, but at a 
certain definite proportion of the value of the land. If 
this arrangement had been adopted, the amount which 
the land-tax yields to the revenue would have been con- 
stantly augmented in proportion to the increase in the 
value of the land; the amount of revenue thus raised, 
though constantly augmenting, would be felt as a burden 
by no class, because the land-tax is as it were spon- 
taneously provided by the appropriation of a natural 
monopoly, and therefore the tax will yield a larger re- 
venue as the value of this monopoly increases. 

The tithe which exists in this country is essentially a Tithes arc 
land-tax, and was originally equivalent in value, as its ^^^'^^g^".* 
name implies, to one tenth part of the produce of the charge. 
land; the tithe has not been usually termed a land-tax, 
because originally it was specially appropriated to religious 
purposes, and consequently did not form a part of the 
general revenue of the State. The greater portion of the 
tithes in this country has not since the Reformation 
served as religious endowments, for tithes are now gene- 
rally possessed by private individuals like any other 
kind of property. A tithe is in fact a rent-charge up- 
on landed property, and this rent-charge is ' frequently 
not possessed by the owners of the land. As far as the 
cultivator is concerned, it manifestly can be a matter 



584 



Manual of Political Economy. 



The Tithe 
Commuta- 
tion A ct. 



It may he 

ultimately 
injurious to 
tithe-pro- 
prietors. 



of no consequence whether such a rent-charge does or 
does not exist. If the land which he cultivates is tithe- 
free, the whole amount which he pays for the use of it 
will be regarded as rent; if, however, the land should be 
subject to a tithe, the amount which the cultivator pays 
for the use of the land will be the same as it would be if 
the land were tithe-free ; but the v/hole of this amount will 
no longer be considered as rent, for it will be shared 
between the landowner and the tithe-proprietor. 

The tithe, like the land-tax, would be now very insig- 
nificant in amount, if it had been originally commuted as 
a fixed money payment. Previous to the Tithe Commuta- 
tion Act, which was passed in 1837, the tithe was assessed 
as nearly as possible upon the principle of making it equi- 
valent in value to one tenth of the produce of the land ; 
the tithe consequently increased as the value of landed 
property increased, for the tithe would manifestly be aug- 
mented if the productiveness of land increased, or if the 
value of agricultural produce advanced. The main object 
of the Tithe Commutation Act was to facilitate the assess- 
ment of the tithe, and the amount which is now annually 
paid as tithe is determined by the average price of corn 
during the previous seven years. It is quite possible that 
tithe-proprietors may be ultimately injured by this com- 
mutation. The amount at which the tithe is now assessed 
being solely determined by the price of corn, it is evident 
that the tithe-proprietor is not benefited by a rise in the 
price of stock. We have frequently in this work expressed 
our conviction that stock is destined to become relatively 
much dearer than corn, because stock must be always 
difficult to import, whereas the area from which corn is 
obtained is rapidly extending. A tithe therefore constantly 
represents in value a smaller proportion of the whole value 
of the produce raised from the land, if the amount at which 
the tithe is assessed is not influenced by the rise in the value 
of stock, but is solely determined by the price of corn. 



On the Land-Tax and Poor-Rates. 585 

A tithe-proprietor under the present commutation book iv. 

derives no benefit from the increased productiveness of ^ ^ll^ ^'. * 

land. Improved methods of tiHage may double the Tithe-^ro- 
produce which is raised from a farm, and yet the tithe ^^^"^^^^^^ 
paid upon it will not be increased, unless there is a rise benefit^ 



rom 



in the price of aOTicultural produce. It was no doubt ^^^mtsecZ 
with great force urged by the promoters of the tithe com- ness of the 
mutation, that a tithe-proprietor ought not to share with ^^*^- 
the landowner the additional produce which results from 
superior agriculture. It was, for instance, maintained that 
the land is rendered more productive by the expenditure 
of capital upon it, and it would therefore be unfair that 
the tithe-proprietor should be benefited by an outlay of 
capital w^hich has been entirely contributed by the land- 
owner. It was moreover argued that the admission of 
this claim on the part of a tithe-proprietor might seriously 
impede agricultural improvements, since landowners would 
be reluctant to invest capital, if others were to share with 
them in the advantages of the outlay. This argument 
in favour of the Tithe Commutation Act no doubt shows 
that the nation may have received some compensation for 
the land-tax having been in this country commuted for a 
fixed money payment. 

Poor-rates are in their incidence very analogous to the Poor-rates 
tithe; in fact they may be reo^arded as a land-tax which is ^^^ o,nalo- 
applied to one special object, and which varies m amount tithes. 
in different districts, proportionately to the relief which the 
poor of a district may require. The poor of this country 
were first entitled to claim subsistence as a legal right, by 
the celebrated Act of Elizabeth. Previous to that time 
the poor were relieved either by the charity of individuals, 
or by the bounty of religious institutions. The dismem- 
berment of the monasteries deprived the poor of their 
principal source of relief, and the nation then became 
impressed with the necessity of no longer permitting the 
indigent poor to depend for subsistence upon casual private 



586 Manual of Political Economy. 

charity. The principle was then adopted which is still 
observed, that landed property should bear the burden of 
supporting the indigent poor. The principle has also been 
observed, that each district or parish should provide sub- 
sistence for its own poor. The rates which have been 
levied for the relief of the poor may therefore be regarded 
as parish ra.tes; the administration and distribution of 
these rates have at different times been regulated by 
The Poor- different rales. The present Poor-Law, which was passed 
I83i ^^ 1834, will probably remain permanent with few altera- 

tions. It introduced many important improvements into 
the system which previously prevailed, and on the whole, 
it seems difficult to devise a better system of poor relief 
than the one now existing. 
Loas espe- The great improvement introduced by this Act of 1834, 
7mdedt'o "^^^ ^^^ discouragement of out-door relief. Several con- 
dischurage tiguous parishes were by this Act formed into a union; 
relief. ^^^ each union erected a building termed the union 
workhouse, in which in-door relief is given to the poor. 
Each parish appoints one or more guardians; these 
guardians form a body which administers relief to the 
poor throughout each union. Whenever relief is applied 
for, the guardians can decide whether out-door or in-door 
relief shall be granted. It is particularly important that 
this power should be reserved to them, because all the 
abuses which may be, and are, frequently connected with 
the poor lav\r system, are due to out-door relief being too 
easily obtained. Such relief offers a premium upon idle- 
ness, because it is difficult to decide whether assistance 
claimed from the parish is really required to provide 
subsistence, or whether it is not obtained merely for the 
purpose of avoiding labour. It is therefore evident that, 
if a claimant for parish relief is subject to neither per- 
sonal restraint nor to any other such inconvenience, im- 
providence and indolence will be greatly encouraged. The 
prudence which ought to govern men's actions will cease 



On the Land- Tax and Poor-Rates. 587 



to operate, a man will marry recklessly, and will save book iv. 
nothing from his earnings as a provision against old age — ;,, — !_» 
or sickness, if he feels that without any discomfort or 
inconvenience he can always obtain assistance from the 
parish when he is distressed. These evil consequences 
which are attendant upon out-door relief were beginning 
to exhibit themselves in a very serious form previous to 
the passing of the Present Poor-Law in 1834. 

The advantages of the present system are apparent, Theadvan- 
because any person who now applies for parish relief can ^^f^ g%^. 
be compelled to enter the union. The people of this sists in the 

,r>,,i -ijii •! • • discourarje- 

country lortunateiy consider that a residence m a union ^^,^^ ^f "^ 

is in some degree discreditable. Moreover the inmates of idleness. 
the union- workhouse are subject to certain restraints 
which are distasteful; the able-bodied are compelled to 
work, and man and wife, except in the case of the aged, 
are not permitted to live together. The food which is 
given ia the union is quite sufficient to provide an ample 
subsistence, and no arrangement is permitted which would 
cause any one to endure personal hardship. The impor- 
tant end is nevertheless attained, of making a residence in 
the union so undesirable, that parish relief is rarely ap- 
plied for, excej3t by the truly necessitous. In Ireland, no 
out-door relief is granted, and the plan seems to work well 
in that country. In England, however, it is still thought 
desirable that many cases of distress should be relieved at 
the homes of the applicants. In the case of a long illness, 
it may be impossible, or, if possible, more expensive, to 
remove the patient into the union. "Whilst he is in his 
owTi home, he can be nursed by his wife or his relations. 
Again, a widow who is left with a large young family, may 
be able to earn a partial subsistence for them, and she 
can thus, if receiving some small assistance from the 
parish, maintain herself and family by her own industry. 
If out-door relief was in such a case refused, the family 
would be compelled to enter the union ; a great additional 



588 



Manual of Political Economy. 



The oppo- 
sition 
of Mr. 
Malthus 
and other 
loriters to 
the poor- 
law is 

partly to he 
explained 
by the 
smaller 
prosperity 
of the 
country 
when they 
wrote. 



expense would be thrown upon the parish, because it 
would be obliged to feed and clothe the family entirely, 
instead of providing them with some trifling relief It 
therefore appears that our present poor-law system attains 
the important end of giving out-door relief in those cases 
only in which it is desirable to do so. At the same time, 
residence in the union -workhouse is so generally distaste- 
ful, that in-door relief would be seldom claimed except by 
those who cannot obtain work, or who are unable, from 
other circumstances, to provide themselves and their 
families with a livelihood. Hence little danger is in- 
curred of diminishing either the industry or the prudence 
of the people, by giving too much assistance to the indo- 
lent and improvident. 

Many writers have expressed strong antagonism to the 
principle of the poor-law. Mr. Malthus w^as the most dis- 
tinguished opponent of the system of poor-law relief, and 
his treatise on the subject exhausts the arguments which 
can be advanced in support of the opinions he advocates. 
It must be remembered, however, that Mr. Malthus ob- 
served the poor-laws in operation under circumstances very 
different from those existing at the present time. The 
country was then not as wealthy as now; continued war 
had interfered with the development of our national re- 
sources, and successive bad harvests at the commencement, 
of the present century had caused great distress among the 
labouring classes. In the agricultural districts, half the 
able-bodied labourers were unemployed during the winter 
months. Out-door relief was then, as we have previously 
remarked, far more freely granted than now. When such 
a state of things existed, Mr. Malthus was naturally led to 
the conclusion, that industry and prudence amongst the 
working classes might be seriously discouraged by poor-law 
relief; he also had just grounds for concluding, that the poor- 
rates would soon absorb a considerable portion of the income 
derived from property, if some check were not placed upon 




On the Land-Tax and Poor-Rates. 

the amount of relief whicli was granted. But since Mr. 
Malthus wrote, the prosperity of the country has won- 
derfully advanced ; capital has been so rapidly accu- 
mulated, that all the able-bodied labourers of the country 
can not only find work, but obtain higher wages than 
they were previously accustomed to receive. Our colonies, 
moreover, afford a prosperous career for the emigrant, 
and during the last twenty years our labour market, if 
redundant, has always been relieved by emigration. 
Although, therefore, a system of poor-law relief can now Poor-laws, 
in our country produce few of those evils which once alwa7'jro- 
seemed imminent, yet it must not be forgotten, that duce some 
poor-rates, however well administered, cannot either be ^^^ ^' 
raised or distributed without leading to some undesirable 
results. 

We have, for instance, already stated that our poor-law 
has always been based on the principle, that each district 
or parish should maintain its own poor. It is evident that The law of 
this principle, when carried into practical effect, leads in ^^ ^^^^<'t 
the first place to a law of settlement, and secondly, to 
great inequalities in the amount of poor-rates levied in 
different districts. A law of settlement is manifestly 
rendered necessary, because, since each parish is bound to 
maintain its own poor, some distinct rules or laws must be 
laid down, which will enable each parish to know who are 
the poor that really belong to it. A settlement in a parish 
signifies that a person has a right to apply to the parish 
for parochial relief. The rules or circumstances which 
give an individual a settlement in a parish are determined 
b)y the legislature; hence, a la,w of settlement necessarily 
belongs to our system of poor relief Formerly, an indi- has tended 
vidual belong^ed throuo^h life to the parish in which he '^ ^^'^T 

^ ^ r. ■, , . , wages %n 

was born ; such a law oi settlement, as we have previously particular 
said, has been very instrumental in causing a low rate of ^^^^^''<^^' 
wages to prevail in particular districts. Each labourer 
was, in a great degree, restricted to the parish in which he 



59^ Manual of Political .Economy. 

BOOK IV. was born; since other parishes would be unwilling to 
' — !, — 1> accept him, because his children might be settled upon 
the parish to which he might remove. The law of set- 
tlement has, however, been greatly relaxed by recent 
legislation, and labourers now obtain a settlement in a 
parish, after they have resided in it five years. 

The princi]3le that each parish should support its own 
poor, often causes a great hardship to be inflicted upon 
the labourers, when the entire land of a parish happens 
to be owned by one proprietor. We could recall nume- 
rous instances where such a proprietor, either by pulling 
down cottages or forbidding the erection of new ones, 
drives the labourers employed upon his estate into a 
neighbouring town or village, and thus frees his land from 
poor-rates. The injustice of such a course of action is 
evident ; the labourer is compelled to walk, perhaps many 
miles, to his work, and parishes are saddled with poor who 
really do not belong to them. Such conduct on the part 
of landed proprietors tends to concentrate the poor in 
The poor- particular localities, and is one of the causes of the striking: 

Caw also . ,... i-i t • ^ 

tends to mequahties m the amount of poor-rates whicn are levied 
produce {j^ different districts. Thus the poor-rates in manv ao-ri- 

great tn- ^ j o 

c2mZ^^^■e5o/ cultural towns have frequently been as much as 10s. or 
difermt ^^^' ^^ *^® pound; these high rates being in a great 
districts, measure due to the fact, that many of the agricultural 
labourers employed in the adjoining districts are com- 
pelled to live in the town. The most extraordinary 
inequalities in poor-rates are also exhibited in our large 
towns; for instance, no poor reside in many of the wealthy 
parishes in the west end of London, and the poor-rates in 
these parishes are consequently nominal. Other parishes, 
however, in the east end of London, are almost entirely 
occupied by the dwellings of the labouring classes, and the 
poor rates in these parishes are frequently as much as 75. 
or 8s. in the pound. Hence arises the unjust anomaly, 
that the amount of poor-rates in a parish generally varies 



On the Land-Tax and Poor-Rates. 591 

in the inverse ratio of the wealth possessed by those who book iv. 

. -, . ., CH. IV. 

reside m it. « . < 

It has been frequently attempted to remedy this ano- Proposals 
maly, by propounding various schemes for equalising the-^rj^^'^^^" 
poor-rates. Some have proposed that a national rate shall poor-rate 
be levied, so that property should contribute equally to^^'^^^J^Jf 
the support of the poor throughout the country. An in- 
superable objection, however, may be urged against this 
scheme; because a national rate would inevitably be 
distributed with reckless extravaga;nce. Under our present 
poor-law, the guardians of each parish have a direct 
interest in administering the rate with the greatest possible 
economy ; they are often large rate-payers themselves, and 
if they showed any inclination to be extravagant, they 
would be immediately called to account by the rate-payers 
whom they represent. But if the guardians of each parish 
could draw upon a national rate, they would consider that 
any additional amount which they might expend would 
produce an inappreciable effect upon the v/hole rate which 
was levied; and hence the parochial authorities, instead 
of scrupulously restricting their expenditure, would as it 
were compete against each other to obtain as much of the 
national rate as possible. In order to illustrate what Such an 
would occur, we may refer to the fact, that although each ^^^uldYead 
tax-payer is directly interested in the government spending to great 
the revenue of the State with economy, yet a town is ^^^^ce. 
particularly grateful to its parliamentary representative, 
if he can succeed in making the government spend money 
upon the district which he represents. His constituents, 
in the abundance of their gratitude, would never think of 
enquiring whether the expenditure was, or was not, justi- 
fiable. Hence a national poor-rate would inevitably be 
administered so extravagantly, that a great deal more 
would be spent upon the relief of the poor than is expend- 
ed at the present time. The labouring classes would ulti- 
mately be most injured by such an excessive expenditur(?, 



592 Manual of Political Economy. 

BOOK IV. for the indolent and imprudent would be rewarded at Llie 

^ \ — '-- expense of the industrious and provident workman. The 

objections which have been urged against a national rate, 
apply in a much less degree to a union-rate. Such a rate 
would, moreover, provide a remedy against the evil which 
is so often caused by landlords refusing to have proper 
cottage accommodation on their estates, in order to avoid 
the poor-rates. 
Poor-rates In conclusion, we may remark that the poor-rates when 
levied upon jniposed upon land are really paid by the landowner ; they 

Land are r r ^ j i j ■> j 

really paid are deducted from his rent, and are as much a charge upon 
?^ ^^ land as is the tithe. In England it is customary for the 
poor-rates to be paid by the tenant-farmer and not by the 
landlord ; it is, however, not the less true that the landlord, 
and not the tenant, really pays these rates, for if no tax- 
ation should be levied for the support of the poor, the 
landlord would be able to increase his rent, by the exact 
amount, which the tenant had previously been obliged to 
pay to the poor-rates. 

It must however be borne in mind that these rates are n^ t 
solely levied upon the land, but are also imposed upon dwell- 
ings, manufactories, and upon various public works, such as 
It is erro- railways and canals. Political economists usually main- 
neous to ^g^[j^ that, even in these cases, the poor-rates ought to be 
that poor- regarded simply as a charge upon land. On this point, 
rates are ^q venture to differ from many high authorities : for we 

solely a ^ ^, . ^ .""^ 

charge believe it can be proved that m many cases poor-rates are 
ujyon land j^^-j- really paid by the owner of the land on which a dwell- 
are levied ing-house or a manufactory may be built, but by the occu- 
upon -g^ q£ ^q house and by the consumer of the commodities 

which may happen to be produced in the particular manu- 
factory. First, let us consider the case of a dwelling-house ; 
and here it is evident that the rates must be paid, either 
by the owner of the land on which the house is built, or 
by the builder of the house, or lastly, by the occupier of 
the house. It is quite evident that the builder will not 



On the Land- Tax and Poor- Rates. 593 

pay these rates, because he will not invest capital in a book iv. 
trade unless he can realise the ordinary rate of profit. .^ \ ' . 
Thus, suppose that a builder considers 10 per cent, a fair 
interest for his capital; let it be further assumed that he 
erects a house, the whole cost of which is 1000^.; 100?. 
having been paid for the ground on which it is built, the 
building itself having cost 900?. This builder will have 
made a comparatively unprofitable speculation unless he 
obtains 10 per cent, on his outlay, or, in other words, unless 
he is able to let this house for 100?. a year. In all trades 
the profit realised is regulated by the competition of capi- 
tal. Individuals will not continue to embark capital in a 
business unless they expect to obtain a fair average remu- 
neration ; it therefore seems to be conclusively proved, that 
the builder does not pay the rates which are levied upon 
the house he erects, because if he did so, his profits would 
be reduced below the ordinary rate, and he would not con- 
sent to continue an unremunerative business. 

Having established this proposition, it necessarily follows 
"^hat poor-rates must be paid either by the occupier of a 
nouse or by the owner of the land on which it is built. 
Let it be assumed that the rates are twenty pounds per 
annum^ upon the house which has been supposed to cost 
1000?., and which is let for 100?. per annum. Those who Poor-rates 
maintain that these rates are a charge upon the land, must SJ"/*f ^^j^ 
be also prepared to admit, that if there had been no rates the occn- 
the owner of the land on which the house is built would ^jl^H^f 
have been able to have sold this land for a sum which 
would have yielded 20?. a year more than is yielded by the 
100?., this being the amount for which the land is really 
supposed to have been sold. Assuming therefore that the 
current rate of interest is 5 per cent., the land must have 
sold for 500?. instead of 100?. if we adopt the hypothesis 
that the poor-rates are a charge upon land. When inves- 
tigating this question, it is essential to remember that the 
value of building land is in different cases determined by 

QQ 



594 Manual of Political Economy. 

two distinct sets of causes. In some particular situations 
building-land is absolutely limited in supply; thus the 
number of houses that can be built in Fleet Street cannot 
exceed some definite number; but when houses are erected 
on the margin of towns, the quantity of land which is avail- 
able for building purposes is practically unlimited. In this 
latter case, the value of building-land cannot greatly exceed 
its agricultural value, because there is land contiguous, 
which would do equally well for building and which is only 
devoted to agriculture ; this land therefore would be sold 
for building, if a price much exceeding its agricultural 
value was offered for it. In the case we have above sup- 
posed, where 100^. is paid for a plot of land, probably an 
almost indefinite number of similar pieces of ground could 
be obtained at the same price. If therefore there were 
no poor-rates, it is absurd to say that the same piece of 
land would be sold for 500^., since the remission of these 
rates would only slightly increase the agricultural value of 
the land, and in the case we have been discussing, it has 
been shown that the value of the land when sold for build- 
ing purposes cannot greatly exceed its agricultural value. 
Hence we affirm, that poor-rates and other rates are really 
paid by the occupier of a house, unless the house is in 
some special situation, such as Fleet Street, where the 
number of houses that can be built is absolutely limited. 
It can be easily shown that in this latter case these rates 
are really a charge upon land. The owner of a piece of 
ground at Charing Cross is virtually the possessor of a 
commodity, the supply of which cannot be increased. The 
pecuniary advantage of such a situation will be accurately 
calculated by those who are anxious to purchase a house in 
Charing Cross, and the estimate which different individuals 
arrive at, will determine the price which is offered for the 
ground. 
hhuiuin -^^^ ^^ suppose that some one engaged in business 
sorm parti- purchases the ground for 5000/., and erects upon it a house 



On the Land-Tax and Poor-Rates. 595 

which will cost 3000?. Suppose that the rates on the bookiv. 
house are 100?. a year; then if we capitalise the tax, as- > ^^■J-'^- , 
suming the rate of interest to be 5 per cent., the tax will ^y^i^^^ gn^_ 
represent an additional outlay of 2000?., and therefore the ^^*o*^' 
whole building will cost 10,000?. We may further suppose are paid 
that there were several other persons who would have ^3/ ^^ 
given 4,500?. for the piece of ground, and they were pre- the land 
pared to have erected a house which would cost 3000?., "'J^^ ^^^ ^^ 

the occu- 

because they thought it would answer their purpose to pier of the 
expend 9,500?. (assuming the rates to be capitalised), in-^^'Mse. 
order to obtain a house in such a situation. Let us en- 
quire what would take place if just before the bargain had 
been completed all the rates had been remitted. In our 
opinion, the value of the land would be immediately in- 
creased by an amount equivalent to the capitalised value 
of the rates. The individual who was before willing to 
spend 10,000?. in order to secure a house in this situation, 
would still be willing to spend this amount if it was 
necessary to do so. The competition of others would com- 
pel him to make this outlay, because there are those who 
are willing to spend 9,500?. to obtain a house in this situa- 
tion. Hence the price paid for the land would advance, by 
an amount exactly equivalent to the capitalised value of 
the rates ; or, in other words, the owner of the land would 
secure the whole advantage arising from the remission of 
the rates, and this is equivalent to saying that the rates 
are solely a charge upon the land. We therefore affirm, 
that the rates levied for the relief of the poor and for other 
purposes are really paid by the landowner, when a house 
is built in a situation, where the number of the houses that 
can be built is absolutely limited; but we also affirm that, 
in other cases, the burden of these rates almost entirely 
falls upon the occupiers of houses. This proposition appears 
to us to be of fundamental importance ; for the occupiers 
of houses would not be injured by high and increasing 
rates, if the opinion of those be correct, who state that 



59^ 



The con- 
sumers of 
commodi- 
ties o^eally 
•pay the 
rates which 
are levied 
upon. 
manu- 
factories. 



Manual of Political Economy. 

such rates ought to be regarded as solely a charge upon 
land. 

It is easy to trace the incidence of local taxation, when 
it is imposed upon manufactories. If, for instance, a cotton- 
manufacturer has to contribute 500?. a year to the poor- 
rates, his aggregate expenses are increased. Hence the 
cost of producing the goods which he manufactures is 
augmented; it therefore follows that the consumer must 
pay a higher price for these goods, because the value of a 
manufactured commodity is regulated by its cost of pro- 
duction. 



CAMBRIDGE: PRINTED AT THE UNIVBKSITY PEESS 




